Goodman, Take-up of Payroll Tax-Based Subsidies During the COVID-19 Pandemic (OTA Working Paper 121; published as 'Delivering Aid to Businesses through the Payroll Tax System: The Case of the Employee Retention Credit', National Tax Journal 76(2), June 2023 (doi 10.1086/724133), 2021-11-08)

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Office of Tax Analysis Working Paper 121, dated November 8, 2021, titled Take-up of Payroll Tax-Based Subsidies During the COVID-19 Pandemic, by Lucas Goodman of the U.S. Department of the Treasury. The paper uses preliminary payroll tax microdata to study take-up of the paid sick and family leave credit, the deferral of some payroll tax liability, and the Employee Retention Tax Credit (ERTC). It states that fewer than 3% of employers chose to defer any payroll tax, and that ERTC take-up was approximately 1% in 2020 and about 3% in 2021. It also reports that variation by paid preparer explains a substantial component of ERTC take-up, but not deferral or paid sick and family leave take-up.

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“Goodman, Take-up of Payroll Tax-Based Subsidies During the COVID-19 Pandemic (OTA Working Paper 121; published as 'Delivering Aid to Businesses through the Payroll Tax System: The Case of the Employee Retention Credit', National Tax Journal 76(2), June 2023 (doi 10.1086/724133), 2021-11-08).” Original at home.treasury.gov. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/goodman-take-up-of-payroll-tax-based-subsidies-during-the-covid-19-pan-0d370e460d/, SHA-256 6b7ab717f35726f2678a8125c9acc77d56c0d49eb6b759cbe71c6f3b810bc143.

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Office of Tax Analysis
Working Paper 121
November 2021

Take-up of Payroll Tax-Based Subsidies During the
COVID-19 Pandemic

Lucas Goodman

The OTA Working Papers Series presents original research by the staff of the Office of Tax
Analysis. These papers are intended to generate discussion and critical comment while
informing and improving the quality of the analysis conducted by the Office. The papers are
works in progress and subject to revision. Views and opinions expressed are those of the
authors and do not necessarily represent official Treasury positions or policy. Comments are
welcome, as are suggestions for improvements, and should be directed to the authors. OTA
Working Papers may be quoted without additional permission.
TAKE-UP OF PAYROLL TAX-BASED SUBSIDIES DURING THE
COVID-19 PANDEMIC

November 8, 2021
Lucas Goodman 1

During the COVID-19 pandemic, Congress enacted several subsidies
administered through the payroll tax system: a credit for paid sick and family
leave, a deferral of some payroll tax liability to future years, and the Employee
Retention Tax Credit (ERTC). This paper uses preliminary payroll tax microdata
to study the take-up of these subsidies. I ﬁnd that take-up for the paid sick and
family leave credit was imperfect at best and the take-up for deferral and the
ERTC was quite low. I then analyze potential explanations for the low take-up. I
ﬁnd that variation by paid preparer explains a substantial component of ERTC
take-up, but not deferral or paid sick and family leave take-up.

Keywords: COVID-19, payroll tax, Employee Retention Tax Credit, CARES Act,
paid sick and family leave, incomplete take-up
JEL Codes: H25, H32, H84, J32

1Lucas Goodman: Office of Tax Analysis, U.S. Department of the Treasury, Lucas.Goodman@treasury.gov.

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1 Introduction

During the COVID19 pandemic, the U.S. federal government provided substantial fiscal sup
port, in many forms. The IRS sent three rounds of Economic Impact Payments (EIPs) totalling
$3,200 per person to most adults. Unemployment insurance was made considerably more gen
erous, with a flat $600 increase in weekly benefits during much of 2020, leading to wage re
placement rates in excess of 100 percent for many unemployed persons (Ganong et al., 2020;
Larrimore et al., 2021). And Congress created the Paycheck Protection Program (PPP) which
provided approximately $800 billion in lowinterest rate loans to small businesses which
could be forgiven under certain conditions, such as incurring sufficient amount of payroll
expense.
Additionally, Congress provided support to businesses through the quarterly payroll tax sys
tem. First, the Families First Coronavirus Response Act (FFCRA) mandated that most small
employers provide paid sick and family leave, which was fully reimbursed by the federal govern
ment in the form of a payroll tax credit. Second, in the CARES Act, Congress allowed businesses
to defer a portion of their payroll tax obligation to December 2021 and December 2022. Third,
the CARES Act created the Employee Retention Tax Credit (ERTC), which initially provided a
50% subsidy for some wages paid by employers experiencing COVID19related hardship.
This paper uses payroll tax filings through the second quarter of 2021 to study takeup of
these subsidies. While takeup of the paid sick leave credits was nontrivial – approaching 50%
for firms most likely to be affected – takeup of the family leave credits (which applied to leave
taken by parents who were unable to work due to a childcare or school closure) was only 15%
for such firms. More strikingly, fewer than 3% of employers chose to defer any payroll tax;
this share is increasing in the size of the employer, but remains substantially less than 100%
even for the largest employers. The takeup rate for the ERTC was even lower: approximately
1% in 2020; takeup increased to about 3% in 2021 when eligibility and generosity were

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substantially expanded.
Next, I explore the relatively modest variation in takeup across industry. Conditional on a
set of fixed effects for quarter and number of employees, manufacturers were about 5 percentage
points more likely to claim paid leave credits, perhaps because manufacturing employees were
subject to a higher risk of COVID19 exposure. Takeup of payroll tax deferral was highest
in the “management of companies and enterprises” industry, perhaps because such employers
are more sophisticated than would typically be implied by the number of employees directly
working for the employer. Takeup of the ERTC was highest in the accommodations and food
services and arts, entertainment, and recreation industries, consistent with such employers being
more likely to be eligible. Finally, I find that paid preparers can explain a noticeable share of
variation in ERTC takeup, but not paid leave takeup or takeup of payroll tax deferral. In
particular, I find that ERTC takeup in the restaurant industry (NAICS 722) in 2021Q1 (when
eligibility was likely most expansive) would have been as high as 50% had all preparers been
replaced by preparers in the 90th percentile of ERTC takeup, rather than 8.6% takeup as was
actually seen.
There is a small existing literature studying the effect of the paid leave credit. Andersen et al.
(2021) exploits prepandemic differences in the population of nonessential workers to find that
the policy decreased mobility as measured by mobile phone data. Pichler et al. (2020) use a
differenceindifferences design, using states with preexisting paid leave policies as a control
group, and finds that the policy reduced COVID19 cases by approximately 400 per day. To the
best of my knowledge, the present paper is the first to study empirically the deferral of payroll tax
liability or the ERTC.1 More broadly, this paper contributes to the large and growing literature
examining the role of fiscal support during the pandemic. While a detailed review is beyond
1
In July 2021, the Congressional Budget Office released preliminary information on aggregate amount of paid
leave credits and ERTC processed by the IRS, along with brief explanations for why these amounts may have been
less than initially predicted (Congressional Budget Office, 2021a,b).

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the scope of this paper, some prominent examples include Bhutta et al. (2020) on the simulated
effect of fiscal support on financial security, Baker et al. (2020) on the consumption response to
EIPs, Marinescu et al. (2021) on the effect of the expanded UI on employment outcomes, and
Granja et al. (2020), Hubbard and Strain (2020), and Faulkender et al. (2021) on the effect of
the PPP. The present paper contributes to this literature by providing descriptive statistics on a
set of subsidies that has received limited attention so far.
This paper is also related to a literature that studies the incomplete takeup of government
provided benefits, tax or otherwise. At least as far back as Moffitt (1983), public finance
economists have recognized that takeup of cash or inkind transfer payments was far from com
plete, perhaps due to stigma as suggested in this original work, or due to program complexity
as argued by Kleven and Kopczuk (2011) and Bhargava and Manoli (2015). While one might
expect both stigma and complexity to play less of a role in the context of takeup of benefits for
businesses, there is also a literature that has found imperfect takeup of “bonus” depreciation
(Kitchen and Knittel, 2016) and net operating loss carrybacks (Zwick, 2021). The present paper
contributes to this literature by showing there was substantially imperfect takeup of benefits
designed largely to help businesses weather a crisis.

2 Background on provisions

In this section, I provide background information on the three subsidies that I analyze in this
paper. This section is not intended to be a comprehensive description of these subsidies. More
complete descriptions and the most updated guidance can be found on irs.gov.

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2.1 Paid leave credits

The FFCRA, passed on March 18, 2020, created a mandate for most firms with under 500 em
ployees to provide paid sick and family leave to employees for the period April 1, 2020 through
December 31, 2020. The sick leave component required employers to pay 100% of an em
ployee’s normal wage (up to $511 per day) for up to two weeks for certain qualifying COVID19
related purposes. Some of the most common purposes include being sick with COVID19, being
under a COVID19related quarantine order, or caring for an immediate family member sick or
under a COVID19 quarantine order. The family leave component required employees to pay
2/3 of an employee’s normal wages (up to $200 per day)2 for up to ten weeks in the case of an
employee unable to work due to needing to care for a child whose school or childcare is closed
for COVID19 related reasons. The statute exempted business with fewer than 50 employees
from the requirement to provide family leave if it would “jeopardize the viability of the business
as a going concern.” Under the provision, all amounts paid for required paid or family leave
generate a payroll refundable tax credit, dollar for dollar. However, to the extent that the family
or sick leave is paid with the proceeds of a PPP loan, the credit is not allowed. Furthermore,
employers were not required to provide leave to employees that had the capability of performing
telework. Additionally, employers in the health care industry were excluded from the mandate.
The requirement to provide such leave expired at the end of 2020. However, subsequent
legislation extended the credits for paid leave through September 30, 2021. During this period,
the credit is equal to the amount of paid leave that would have been required had the mandate also
been extended. Additionally, subsequent legislation added a new qualifying reason for taking
leave: obtaining a COVID19 vaccination or recovering from their side effects.
The Joint Committee on Taxation (2020a) estimated that the paid leave credits in the FFCRA
2
(2 )
That is, the credit attributable to a given employee on a given day is equal to min 3 w, 200 , where w is the
daily wage.

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had a revenue effect of about $105 billion, with the extensions in the subsequent legislation
costing an additional $8 billion (Joint Committee on Taxation, 2020c, 2021).3

2.2 Deferral of employer share of Social Security tax

In general, employment generates Social Security tax liability equal to 12.4% of wages up to
the Social Security Contribution and Benefit Base ($137,700 in 2020). Formally, half of this
component is paid for by the employee and the other half by the employer. In most cases, this
distinction has little practical effect: employers simply deposit the combined amount required
to be paid, including both the “employer half” and withholding attributable to the “employee
half.” The CARES Act, passed on March 27, 2020, allowed employers to defer payment of the
employer half of Social Security tax incurred between March 27, 2020 and December 31, 2020.
Half of the deferred amount must be paid no later than December 31, 2021, while any remaining
amount must be paid no later than December 31, 2022.
Additionally, on August 8, 2020, President Trump issued an executive memorandum direct
ing the Department of the Treasury to allow employers to defer the employee half of Social
Security tax on wages paid between September 1, 2020 and December 31, 2020 for employees
earning less than $4,000 on a biweekly basis. Any deferred amount must be collected from
employees and remitted to the IRS by April 30, 2021. President Trump directed the federal
government to take up this deferral on behalf of federal employees.
3
JCT estimates do not correspond perfectly to the estimated amount of credits claimed, since they additionally
include revenue effects of behavioral adjustments and any effects of the credits on income tax liability. Additionally,
these particular estimates include a component of the policy that applies to selfemployed persons which I do not
study in this paper.

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2.3 Employee Retention Credit

The CARES Act created the Employee Retention Tax Credit, or ERTC. Under the original ver
sion of the credit, eligible employers could claim a credit for 50% certain qualifying wages
between March 27, 2020 and December 31, 2020, with qualifying wages capped $10,000 per
employee (aggregated over the entire March 27 December 31 period). Roughly speaking,
an employer could qualify if their gross receipts for the quarter were down by more than 50%
relative to the same calendar quarter in 2019 or if they were subject to governmental order to
completely or partially suspend operations. For employers with more than 100 fulltime em
ployees in 2019, the credit could be claimed with only with respect to wages or health insurance
premiums paid to workers who were not working (for this purpose, remote work is considered
“working”). For employers with 100 or fewer fulltime employees in 2019, the credit could
be claimed with respect to the wages and health insurance premiums of all employees during
the quarter (if the gross receipts test is met) or during the suspension period. Importantly, an
employer who received a PPP loan (whether the loan was forgiven or not) was not eligible to
claim the ERTC.
The Consolidated Appropriations Act (CAA), passed on December 21, 2020, extended the
ERTC to June 30, 2021 and expanded the ERTC along nearly every dimension. The credit
rate was inreased from 50% to 70%. The $10,000 wage cap was changed to apply quarterly,
rather than cumulatively. The gross receipts threshold was made more lenient, requiring only a
20% decline in gross receipts. The threshold at which employers could claim the ERTC for all
employees (rather than those not working) was increased from 100 to 500 employees.
Finally, and critically, Congress eliminated the automatic denial of the ERTC for all PPP
participants, replacing it with a “denial of double benefit” rule under which the same wages
could not be used for the ERTC and to obtain PPP forgiveness. This rule nevertheless provides
substantial opportunity to benefit from both programs. As a simplified example, consider an

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employer with $100,000 of monthly payroll expenses and assume for simplicity that no worker
is paid more than $10,000 per quarter.4 The PPP loan amount would generally be 2.5 times
monthly payroll, or $250,000. A business is eligible for forgiveness if its payroll during the
“covered period”, which can be as long as 24 weeks, exceeds 60% of the loan amount ($150,000
in this example). This simplified employer would accrue approximately $550,000 in payroll
costs in a 24week covered period. In general, it would be optimal for this employer to use
$150,000 in wages for the purpose of PPP forgiveness and use the remaining $400,000 to claim
the ERTC.
The CAA amendments to the ERTC were made with respect to wages paid after Decem
ber 31, 2021, except that the amendment to the PPP interaction was made retroactively. Thus,
an employer who was otherwise ERTCeligible but who was a PPP participant could file an
amended Form 941 in order to claim the credit. However, there is no mechanism to amend a
prior PPP forgiveness application – if an employer listed all wages on their PPP forgiveness
application (e.g., because they knew they were ineligible for the ERTC under preCAA law, so
they assumed it was costless to list all wages on the application), then they would not be able to
claim the ERTC with respect to any of those wages.
The American Rescue Plan, passed on March 11, 2021, extended the ERTC (as amended by
the CAA) to December 31, 2021. It created a third category of eligible employers for the third
and fourth quarters of 2021: “Recovery Startup Businesses” (RSPs). An RSP is an employer that
begin operations after February 15, 2020 and has less than $1 million in average annual gross
receipts. An RSP computes its credit with respect to the wages it pays during each quarter,
subject to an additional $50,000 per quarter, per employer cap on the total credit. As these
provisions take effect after my sample period, I do not study them in this paper.
4
The presence of wages above $10,000 per quarter would tend to enhance the ability to take advantage of both
programs, though it gets more complicated if some employees are paid at an annual rate of more than $100,000.

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The Joint Committee on Taxation (2020b) estimated that the CARES Act version of the
ERTC would have a revenue effect of $55 billion, while the additional modifications in later leg
islation would have a revenue effect of about $30 billion (Joint Committee on Taxation, 2020c,
2021).

3 Data and Empirical Adjustments

All three subsidies studied in this paper are claimed on Form 941.5 I use data from Form 941
for 2019Q3 through 2021Q2, retrieved on September 20, 2021.6 Importantly, this database
does not include amended Forms 941 – thus, any credits claimed on amended returns will not
appear in this analysis. To the extent that a substantial number of employers determine their
eligibility with a long delay, the present analysis may nontrivially understate takeup. I make
the approximation that firm is identified by the Employer Identification Number (EIN) reported
on Form 941; given imperfect information, I do not attempt to aggregate related parties together.
The database holding these records includes only those forms that have been processed by the
IRS, meaning that my data does not capture the full population. Although the deadline for filing
Form 941 in each quarter under study has passed – meaning that the vast majority of Forms 941
have been filed – the pandemic has caused substantial processing delays for paperfiled returns,
including paperfiled Forms 941. Figure 1 shows counts of processed Forms 941, separately by
filing method. The number of efiled Forms 941 has followed a stable trend through 2021Q1,
suggesting that the vast majority of efiled returns are processed promptly. However, there is a
5
Form 941, filed by employers each quarter, is used generally to report the tax payments that employers remit
to the IRS (1) to satisfy the employer and employees’ FICA (Social Security and Medicare) tax liability and (2) as
withholding of individual income tax.
6
I drop all Forms 941 with zero reported wages. In situations where a measure of firm size (number of em
ployees) is desired, I drop all firms whose implied average compensation is less than $20 per employee. This deals
with a common data entry error where the same amount is reported on the wage line and the “number of employees
line” (perhaps with a decimal moved), leading to implausible firm sizes.

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substantial dropoff of processed paperfiled returns as early as 2020Q1 (which would have been
processed in spring 2020 under the normal schedule), and 2021Q2 has very few paper returns
processed.
To provide estimates for populationlevel takeup, I assign each firmquarter observation a
weight. First, using 2019Q3 and 2019Q4 data, I estimate the probability of being an efiler in
cells of firm size; let x denote these cells and let px denote the estimated probability of efiling
in each cell. Second, I compute a target amount of wages (that is, Form 941 box 2) for each
quarter, Ŷt . I compute Ŷt as the amount that preserves the ratio of Form 941 wages to National
Income and Product Accounts (NIPA) wages7 that existed in 2019Q4. Put differently, I compute
the ratio (denoted by θ) of 2019Q4 941 wages to 2019Q4 NIPA wages. In 2020Q1 and later, Ŷt is
( )
equal to θ times the NIPA wages in t. Third, I define the weight wit as equal to max 1, 1−pαx(i,t)
t
.
That is, observations that appear to resemble paperfiled returns (i.e., p(x) closer to zero) are
upweighted, while no firm receives a weight less than one. αt is a quarterspecific normalization
term that ensures that the weighted sum of 941 wages is equal Ŷt . As shown in Appendix Figure
A1, this adjustment tends to place higher weight on midsized and large firms in 2021Q1 and
(especially) 2021Q2 when the data is most limited.8

4 Results

Table 1 lists the estimated aggregate amounts of credits/deferral claimed by quarter, using the
weighs described in Section 3. Employers claimed between $1.5 billion (2020Q3) and $3.0
billion (2020Q4) in paid leave credits; the share of employers claiming any paid leave credit
increased from 3.7% in 2020Q2 to 6.8% in each of 2020Q4 and 2021Q1, before falling to 4.6%
7
BEA Account Code NA000275.
8
Due to data constraints, I must drop the small number of paperfiled 2021Q2 returns when analyzing the paid
leave credits. Thus, in 2021Q2, the weights used to analyze the ERTC are different than the weights used to analyze
the paid leave credits. (There was no deferral in 2021Q2.)

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in 2021Q2. Employers deferred $41 to $43 billion of payroll tax in each quarter from 2020Q2
through 2020Q4, though the vast majority (over 97%) of employers did not participate. Em
ployers claimed approximately $7.6 billion in the ERTC in 2020Q2, much less in 2020Q3 and
2020Q4, before increasing substantially after the yearend expanstion of the ERTC: employers
claimed $14.1 billion in ERTC in 2021Q1 and $16.4 billion in 2021Q2. Participation in the
ERTC was very rare during 2020 (takeup between 0.7% and 1.3%) and increased only mod
estly in to 2.6% in 2021Q1 and 2.8% in 2021Q2. I next explore each of these subsidies in more
detail.

4.1 Paid leave credits

Figure 2 plots the extensive margin takeup of paid leave credits as a function of firm size,
aggregated over the 2020Q22021Q1 period. Takeup is approximately zero for oneemployee
firms and increases to approximately 45% for firms with 100 to 300 employees. It then falls
closer to zero as firm size exceeds 500, the threshold for determining credit eligibility.9 The
vast majority of paid leave claimants claim credits for sick leave; a much smaller share claim
credits for family leave.10
The upward slope in takeup might largely be explained mechanically: if a firm has more
employees, the probability that at least one of them must take COVID19related leave increases.
Nevertheless, the takeup of the sick leave credits by the largest affected firms – e.g., those with
100500 employees – is lower than one might initially expect. As a backoftheenvelope ex
ercise, the number of confirmed COVID19 cases through the end of 2021Q1 is approximately
9
This is not a clean discontinuity, since the definition of firm size for the purpose of credit eligibility is not the
same as the concept of firm size as measured on Form 941. Some differences include rules to aggregate different
employers together for the purpose of credit eligibility and discrepancies in the point in time when employees are
counted.
10
Form 941 stopped separately tracking paid sick leave wages and paid family wages in 2021Q2, which is why
I do not include 2021Q2 in this figure. Appendix Figure A2 plots the takeup of the paid leave credits pooling
2020Q22021Q2; the result is very similar to the solid series in Figure 2.

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10% of the population, or 2.5% per quarter from 2020Q2 through 2021Q1 (Johns Hopkins Uni
versity, 2021).11 If each employee had an independent 2.5% probability of requiring COVID
19related leave, then over 90% of 100employee firms and virtually all firms with more than
200 employees would have at least one employee take such leave. Yet, only half of such firms
claimed any credit for sick leave wages.
There are several explanations for the seemingly imperfect takeup of the paid leave credits.
First, COVID19 cases tend to be clustered, meaning that the independence assumption in the
previous calculation will tend to overstate the number of employers with at least one employee
needing such leave. Second, paid leave wages that generate a credit cannot be used for the
purpose of obtaining PPP forgiveness, so some employers may have decided to allocate such
wages to PPP forgiveness rather than the paid leave credit. Third, some EINs with 100500
employees may be members of a group of related employers who are required to be aggregated
together for the purposes of determining credit eligibility; if the group, aggregated together,
had more than 500 employees, then the employer would not be eligible for the credit. Fourth,
the leave was not required to be provided to workers who had the capability to work remotely.
Finally, it is possible that many employees did not take leave even while infected with COVID
19 or that some employers did not comply with the mandate to provide for such leave.
Next, I explore how takeup varies by twodigit industry. In particular, I regress the takeup
dummy on indicators for each two digit NAICS code, while controlling for firm size fixed effects
(in bins) interacted with quarter.12 The first column of Table 2 reports the coefficient estimates
for each industry; the top two are reported in bold text while the bottom two are reported in
italics. The acrossindustry variation is relatively modest. Manufacturing (NAICS 3133) has
11
The true share of workingage individuals experiencing COVID19 is presumably higher than that, both due
to underreporting and due to the fact that children have much lower susceptibility to the disease.
12
I normalize the coefficients on the industry dummies to have mean zero. In this regression and many other
regressions in this paper, I use the Stata command reghdfe (Correia, 2019).

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the highesttakeup, with a fixed effect of approximately 0.048. Public administration (NAICS
92, which is mostly public sector employers) have the lowest takeup, with a fixed effect of
0.046 – consistent with government employers being ineligible for the paid leave credits during
most of 2020. All other industries have fixed effects between 0.024 and 0.015.
One might expect industrylevel takeup of the paid leave credits to be correlated with
COVID19 risk of the industry. As a crude test of this hypothesis, I regress takeup on the share
of employment that can be done remotely, as measured by Dingel and Neiman (2020), con
trolling for firm size fixed effects. The regression estimate is economically small and slightly
wrongsigned, however, suggesting that either (1) other factors are at play beyond COVID19
risk or (2) the share of remote work is not a good proxy for COVID19 exposure; results avail
able upon request. For instance, it is possible that manufacturing workers are uniquely prone to
COVID19 given the nature of their work.13
The relatively low takeup of the family leave component of the credit is also noteworthy,
given the broad eligibility criteria. In particular, family leave was allowed to be taken when a
parent must care for a child whose school or day care facility closed due to COVID19. Given
that the vast majority of schools did in fact close, especially during 2020Q2, a large share of
the workforce might have been eligible for such leave. One explanation for the low takeup of
family leave is that the wage replacement is much less generous: two thirds of normal wages, up
to $200 per day, rather than 100% of normal wages up to $511 per day for sick leave. Perhaps,
most parents were unwilling to forego one third (or more) of their usual wage in order to avail
themselves of this leave.
13
For example, COVID19 outbreaks at meat and poultry packing plants have been welldocumented (Middleton
et al., 2020).

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4.2 Deferral of payroll tax

The CARES Act allowed employers to defer the employer share of Social Security tax from
March 27, 2020 through December 31, 2020. Employers were also allowed to defer the some
employee Social Security tax under the executive memorandum for wages paid between Septem
ber 1, 2020 and December 31, 2020. Both deferrals are summed together and reported in the
same place: line 13b of Form 941.However, the data is consistent with takeup of the employee
share being trivially small. First, as seen in Table 1, the share reporting any deferral is fairly
constant over the three relevant quarters in 2020, and does not jump in Q3 or Q4 when employee
share deferral became allowed. This suggests that very few firms participated in only the deferral
of the employee share. Second, I find that only 850 firms (or 0.01% of all firms) deferred more
than the employer share in 2020Q3 and 2000 firms (0.03% of all firms) did so in 2020Q4. Thus,
in the rest of the paper, I will abstract from the deferral of the employee share and assume that
the observed deferral corresponds to the deferral of the employer share.
Figure 3 plots the takeup of deferral as a function of firm size, aggregated over the 2020Q2
2020Q4 period when deferral was allowed. Takeup is very low for the smallest firms and rises
substantially – though noticeably less than full – for the largest firms. The second column of
Table 2 reports takeup by twodigit industry, controlling for firm size interacted with quarter.
Takeup in the management industry is noticeably higher – perhaps reflecting the fact that these
employers are more sophisticated than would be implied by the number of employees directly
working for them.
There are several candidate explanations for the low takeup of employer share deferral
among smaller firms. First, hassle costs – e.g., the extra compliance cost of tracking amounts
due several years in the future – could have outweighed the benefit of the effective interest
free loan. Second, managers might have been concerned that they would be unable to pay the
deferred liability in the future due to the bankruptcy of the firm. These managers might have

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been concerned that they would be held personally liable for the unpaid deferred tax liability
under preexisting principles of tax law. Third, the CARES Act provided that employers with
a forgiven PPP loan could not claim deferral; although this prohibition was repealed by June
2020, the initial CARES Act law may have driven 2020Q2 decisions, which may have provided
inertia into later quarters.
For larger firms, where hassle costs are presumably much lower relative to the subsidy
amount – and ability to pay is less in doubt – the takeup rate is indeed much higher, yet still
much less than one. The timing of income tax deductions could provide one explanation for
the residual imperfect takeup. In general, employers may claim an income tax deduction for
employment taxes paid, including the employer share of Social Security tax. The deduction
is claimed when the tax is actually paid – even for accrualmethod taxpayers. Thus, deferral
employment tax liability effectively shifts income tax deductions from 2020 into a later year.
Furthermore, income tax deductions in 2020 might be more valuable than income tax deductions
in later years due another CARES Act provision: the temporary ability to carry losses in 2018
2020 back to offset tax liability in prior years. This potentially could allow 2020 deductions –
but not 2021 or 2022 deductions – to offset income taxed at the higher tax rates in effect prior
to the Tax Cuts and Jobs Act. This slight wedge in effective tax rates on income tax deductions
could have offset the benefit of an interestfree loan.

4.3 Employee retention credit

The left panel of Figure 4 plots the takeup of the ERTC, separately in the 2020Q22020Q4
period and the 2021Q12021Q2 period. The right panel plots a histogram of the the ratio of the
total credit to total wages, among those with positive credit. This figure illustrates the extent
to which the ERTC functioned very differently in 2020 and 2021. In 2020, the ERTC was
predominantly claimed by large firms, who were mostly ineligible for the PPP. These firms

U.S. Department of the Treasury
Office of Tax Analysis 14
November 2021
were eligible generally for the lessgenerous version of the credit that applied only to the wages
(and/or health insurance premiums) paid to employees who were not working. As a result, a
substantial mass of claimants in 2020 claimed a credit for less than 5% of total wages paid in the
quarter, as shown in the leftmost point. By contrast, the 2021 version of the credit was tilted
more towards small and midsized firms, with takeup peaking at just over 5% for firms with
about 100 employees. Additionally, in the right panel, the mass is noticeably shifted to the right
in 2021Q12021Q2 relative to 2020Q22020Q4 – even beyond what is explained mechanically
by the increase in credit rate from 50% to 70%.14
Columns (3) and (4) of Table 2 report how ERTC takeup varies by industry, controlling
for firm size and date. Column (3) restricts to 2020Q22020Q4 when the credit was focused
on large firms and column (4) restricts to 2021Q12021Q2 when the credit was focused on
smaller firms. In both periods, NAICS 72 (a category including restaurants and hotels) and
71 (a category including casinos, gymnasiums, performing arts, and amusement parks) had the
highest takeup. These industries were likely highly affected by reductions in travel and dining
out, as well as government suspension orders.
The low takeup in of the ERTC in 2021Q1 is particularly noteworthy, as eligibility is quite
broad and the credit is quite generous, especially for firms with fewer than 500 fulltime employ
ees. In particular, a firm is eligible for the ERTC in 2021Q1 if their 2021Q1 or 2020Q4 gross
receipts have fallen by at least 20% relative to the same calendar quarter in 2019. Meanwhile,
Opportunity Insights (2021) finds that average small business revenue is down approximately
30% in this timeperiod relative to a prepandemic baseline, suggesting that a very large share of
businesses should qualify under this metric. For a firm with fewer than 500 fulltime employees
that qualifies under this gross receipts test, the firm can claim the credit against the wages of
14
There is some mass to the right of 50% (for 2020Q22020Q4) and 70% (for 2021Q1) because of health insur
ance premiums. The credit attributable to health insurance premiums would appear in the numerator of the ratio
while the premiums themselves would not appear in the denominator of the ratio.

U.S. Department of the Treasury
Office of Tax Analysis 15
November 2021
all employees. Thus, for such a firm, the credit is a 70% payroll subsidy for the first $10,000
quarterly wages of all employees.
Finally, the modest increase in takeup in 2021Q2 is worth some discussion. The increasing
takeup, combined with the general loosening of COVID19 restrictions during this quarter, sug
gests that takeup conditional on eligibility may be increasing. Thus, it appears that employers
are gradually learning about this credit. Furthermore, it is possible that some new claimants of
this credit in 2021Q2 will also file amended returns for past quarters,.

4.4 The role of paid preparers

One hypothesis is that paid preparers could mitigate or reinforce the low takeup of these subsi
dies, much as Zwick (2021) found in the context of net operating loss carrybacks. To quantify
this, I examine the factors that explain takeup of each subsidy in a regression sense. In Table
3, I report the adjusted R2 from regressions of takeup on successively more thorough sets of
fullyinteracted fixed effects. Adding more fixed effects will mechanically increase the R2 ; by
contrast, the degreesoffreedom adjustment for the adjusted R2 means that the adjusted R2 can
fall if a sufficiently uninformative variable (or set of fixed effects) is added to a regression.15
The three columns refer to the three subsidies, while the rows vary the sets of fixed effects. The
first three rows of the table show that, as expected, firm size and industry play a nontrivial role
in explaining variation in takeup, consistent with the results seen so far.
Most importantly, the final row of Table 3 shows that preparers explain very little of the vari
ation in takeup of paid leave credits and deferral of payroll tax. By contrast, preparers appear
much more important in the context of the ERTC. The preparer fixed effects add 5.1 percentage
points to the adjusted R2 , which is substantially larger than the incremental contribution of both
15
The usual formula for R2 is 1 − RSS , where RSS is residual sum of squares and TSS is total sum of squares.
( N −1 )
T SS
The formula for adjusted R2 is 1 − RSS
T SS N −L , where N is the sample size and L is the degrees of freedom used
up by the fixed effects.

U.S. Department of the Treasury
Office of Tax Analysis 16
November 2021
the firm size and industry fixed effects.
To provide further context into the role of preparers in the context of the ERTC, I focus
on the restaurant industry (NAICS 722) in 2021Q1, the quarter in which ERTC eligibility was
expanded substantially. Even if a restaurant does not satisfy the gross receipts test, it is fairly
likely to satisfy the “full or partial suspension” test to qualify for the ERTC, so most restaurants
would probably be eligible for the ERTC.16 But, in order to claim the ERTC, employers would
need to manage the complicated interaction with the PPP. Preparers might be especially valuable
in this environment. In the end, only 8.6% of restaurants in fact claimed the ERTC in 2021Q1.
In Table 4, I report actual takeup of the ERTC by restaurants as well as takeup under
three counterfactuals where preparers are more likely to have their clients claim the ERTC. In
particular, restricting the data to the restaurant industry in 2021Q1, I regress ERTC takeup on
interacted fixed effects for firm size, state, and six digit NAICS code, as well as a separate fixed
effect for preparer. Row 1 reports the overall mean takeup rate by restaurants, 8.7%. In the
second row, I take the mean of the regression fit computed as if all belowmedian preparers
(including the outside option) were replaced with the median preparer.17 This takeup under this
counterfactual is only slightly higher, at 9.0%. In the third and fourth rows, I repeat the same
exercise at the 75th and 90th percentiles respectively. Even at the 75th percentile, the effect
is quite modest: takeup would have been 9.6%. Reflecting the skewness of ERTC claiming
at the preparer level, the 90th percentile counterfactual is substantially higher: takeup would
have been 50.3% if all preparers below the 90th percentile would have been replaced by the 90th
percentile preparer.
16
Indeed, IRS guidance specifically addresses when a restaurant passes this test. In particular, IRS Notice 2021
20 specifically states that a restaurant (for whom indoor dining was normally a “more than nominal” part of their
sales) would typically qualify under this test if indoor dining was banned by order, or if indoor dining was allowed
but social distancing constraints (e.g., mandated capacity limits) had a more than nominal effect on its operations.
17
To be precise, I compute the median preparer weighted by number of clients, excluding the “nopreparer”
firms. When calculating the counterfactual fit, I take the larger of the actual preparer fixed effect – including, if
applicable, the fixed effect for not having a preparer at all – and the fixed effect of the median preparer.

U.S. Department of the Treasury
Office of Tax Analysis 17
November 2021
Several caveats are in order for this finding. First, it may be the case that the highERTC pre
parers are being overly aggressive – causing their clients to claim the ERTC in situations where
they may not be eligible. Put differently, the 90th percentile counterfactual may involve some
overclaiming of the ERTC. Second, it may be the case that different preparers have different
client pools – e.g., the 90th percentile preparers might be those whose typical client happens to
be more likely to be ERTCeligible. Controlling for firm size, state, and detailed industry code
mitigates this explanation, but I cannot rule it out completely.

5 Conclusion

This paper studies takeup of COVID19related subsidies administered through the payroll tax
system. I find that takeup of paid leave credits, deferral of the employer share of Social Security
tax, and the ERTC, were modest at best. I find that takeup is correlated with firm size, both
when eligibility is linked to firm size (as in the case of paid leave credits) as well as when it
is not (as in the case of payroll tax deferral). I also find that differences across paid preparers
explain a noticeable portion of ERTC takeup, but not takeup of deferral or paid leave credits.
One key limitation of this study is that the data source does not include amended returns. This
may be especially important in the case of the ERTC; employers may learn about their eligibility
some time after filing their Form 941 for the quarter and claim the credit on an amended return.
To the extent that this occurs, some of the puzzles regarding the low takeup of a very broad,
very generous credit may become resolved.

U.S. Department of the Treasury
Office of Tax Analysis 18
November 2021
References
Andersen, M., J. Catherine, M. F. Pesko, and K. I. Simon (2021). Paid SickLeave and Physical
Mobility: Evidence from the United States During a Pandemic. NBER Working Paper No.
27138.

Baker, S. R., R. Farrokhnia, S. Meyer, M. Pagel, and C. Yannelis (2020). Income, Liquidity,
and the Consumption Response to the 2020 Economic Stimulus Payments. NBER Working
Paper No. 27097.

Bhargava, S. and D. Manoli (2015). Psychological Frictions and Incomplete Takeup of Social
Benefits: Evidence from an IRS Field Experiment. The American Economic Review 105(11),
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Bhutta, N., J. Blair, L. Dettling, and K. Moore (2020). COVID19, The CARES Act, and Fam
ilies’ Financial Security. National Tax Journal 73(3), 645–672.

Congressional Budget Office (2021a). The Budgetary Effects of the Employee Retention Tax
Credit During the Coronavirus Pandemic.

Congressional Budget Office (2021b). The Budgetary Effects of the Tax Credit for Employer
Paid Sick and Family Leave During the Coronavirus Pandemic.

Correia, S. (2019). REGHDFE: Stata Module to Perform Linear or InstrumentalVariable Re
gression Absorbing Any Number of HighDimensional Fixed Effects.

Dingel, J. and B. Neiman (2020). How Many Jobs Can be Done at Home? Working paper.

Faulkender, M. W., R. Jackman, and S. Miran (2021). The Job Preservation Effects of Paycheck
Protection Program Loans. Working Paper.

Ganong, P., P. Noel, and J. Vavra (2020). US Unemploment Insurance Replacement Rates
During the Pandemic. Journal of Public Economics 191.

Granja, J., C. Makridis, C. Yannelis, and E. Zwick (2020). Did the Paycheck Protection Program
Hit the Target. NBER Working Paper No. 27095.

Hubbard, R. G. and M. R. Strain (2020). Has the Paycheck Protection Program Succeeded?
NBER Working Paper No. 28032.

Johns Hopkins University (2021). COVID19 United States Cases by County.

Joint Committee on Taxation (2020a). Estimated Revenue Effects of the Revenue Provisions
Contained in Division G of H.R. 6201, The ‘Families First Coronavirus Response Act’. JCX
920.

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Office of Tax Analysis 19
November 2021
Joint Committee on Taxation (2020b). Estimated Revenue Effects of the Revenue Provisions
Contained in in an Amendment in the Nature of a Substitute to H.R. 748, The ‘Coronavirus
Aid, Relief, and Economic Security (CARES) Act’, as Passed by the Senate on March 25,
2020 and Scheduled for Consideration by the House of Representatives on March 27, 2020.
JCX11R20.

Joint Committee on Taxation (2020c). Estimated Revenue Effects of the Revenue Provisions
Contained in Rules Committee Print 11668, the ‘Consolidated Appropriations Act, 2021’.
JCX2420.

Joint Committee on Taxation (2021). Estimated Revenue Effects of the H.R. 1319, the ‘Amer
ican Rescue Plan Act of 2021’, as Amended by the Senate, Scheduled for Consideration by
the House of Representatives. JCX1421.

Kitchen, J. and M. Knittel (2016). Business Use of Special Provisions for Accelerated Depre
ciation: Section 179 Expensing and Bonus Depreciation, 20022014. Office of Tax Analysis
Working Paper 110.

Kleven, H. J. and W. Kopczuk (2011). Transfer Program Complexity and the Takeup of Social
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Larrimore, J., J. Mortenson, and D. Splinter (2021). Earnings Shocks and Stabilization During
COVID19. Working Paper.

Marinescu, I. E., D. Skandalis, and D. Zhao (2021). The Impact of the Federal Pandemic Un
employment Compensation on Job Search and Vacancy Creation. Working Paper.

Middleton, J., R. Reintjes, and H. Lopes (2020). Meat Plants – A New Front Line in the COVID
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view 83(5), 1023–1035.

Opportunity Insights (2021). Oppotunity Insights Economic Tracker.

Pichler, S., K. Wen, and N. R. Ziebarth (2020). COVID19 Emergency Sick Leave Has Helped
Flatten the Curve in the United States. Health Affairs 39(12), 2197–2204.

Zwick, E. (2021). The Costs of Corporate Tax Complexity. American Economic Journal:
Economic Policy 13(2), 467–500.

U.S. Department of the Treasury
Office of Tax Analysis 20
November 2021
Figures

Figure 1: Number of processed Forms 941 in database, by filing method

Number of Forms 941 filed (millions)

1 2 3

0
2019q3 2020q1 2020q3 2021q1 2021q3
Quarter

E−Filed Paper

Notes: This figure plots the number of Forms 941 currently available in the database for each quarter, separately
by filing method. The data was retrieved on September 20, 2021. Source: Author’s calculations based on the
population of available Forms 941.

U.S. Department of the Treasury
Office of Tax Analysis 21
November 2021
Figure 2: Takeup of paid leave credits by firm size

Share with positive credit

.1 .2 .3

0
1 3 10 30 100 300 1000 3000
Number of employees (log scale)

Sick leave Family leave
Either

Notes: This figure plots the probability that a given firmquarter (it) observation claimed a credit for paid family
or medical leave. The series marked by the gray X plots the share taking up the family leave component. The
hollow circles plot the share taking up the sick leave component. The dark solid circles plot the share taking up
either component of the credit. The data is pooled over the 2020Q22021Q1 period and uses the weights described
in Section 3. These estimates do not include any amounts claimed on amended returns. For the sake of readibility,
all firms with more than 3,000 employees are coded as having 3,000 employees in this figure. Source: Author’s
calculations based on the population of available Forms 941.

U.S. Department of the Treasury
Office of Tax Analysis 22
November 2021
Figure 3: Takeup of payroll tax deferral

Share with positive deferral

.2 .4 .6

0
1 3 10 30 100 300 1000 3000 10000
Number of employees (log scale)

Notes: This figure plots the probability that a given firmquarter (it) observation deferred any amount of employer
Social Security tax as permitted under Section 2302 of the CARES Act. The data is pooled over the 2020Q2
2020Q4 period and uses the weights described in Section 3. For the sake of readibility, all firms with more than
10,000 employees are coded as having 10,000 employees in this figure. Source: Author’s calculations based on
the population of available Forms 941. These estimates do not include any amounts claimed on amended returns.

U.S. Department of the Treasury
Office of Tax Analysis 23
November 2021
Figure 4: Employee Retention Credit

Take−up by firm size Ratio of ERTC to wages
.2
.15

.15

Share with positive ERTC
Density
.1

.05 .1

.05

0 0
1 3 10 30 100 300 1000 3000 10000 0 .2 .4 .6 .8 1
Number of employees (log scale) Ratio of ERTC to total wages

2020Q2−2020Q4 2021Q1−2021Q2

Notes: The left panel plots the share of employers taking up the ERTC, separately in the 2020Q22020Q4 period
and 2021Q12021Q2 period. For the sake of readibility, all firms with more than 10,000 employees are coded
as having 10,000 employees in this panel. The right panel plots a histogram of the ratio of ERTC to total wages
(i.e., box 2 of Form 941), separately by these two periods, among those with positive ERTC. Employers with a
ratio greater than one are placed in the rightmost bin. Both panels use the weights described in Section 3. These
estimates do not include any amounts claimed on amended returns.

U.S. Department of the Treasury
Office of Tax Analysis 24
November 2021
Tables

Table 1: Aggregate amount of credit/deferral claimed

Paid Leave Credits Payroll Tax Deferral Employee Retention Credit
Amount Share Amount Share Amount Share
(1) (2) (3) (4) (5) (6)
2020q2 $1.920b 0.037 $41.292b 0.026 $7.632b 0.013
2020q3 $1.507b 0.043 $42.352b 0.028 $2.008b 0.007
2020q4 $3.012b 0.068 $42.520b 0.026 $1.858b 0.010
2021q1 $2.201b 0.068 $0.000b 0.000 $14.132b 0.026
2021q2 $1.142b 0.046 $0.000b 0.000 $16.448b 0.028

Notes: Columns (1), (3), and (5) report the estimated amount of credits or deferral claimed in each quarter. Columns
(2), (4), and (6) report the share of employers claiming a positive amount of credit or deferral. These estimates
use the weights described in Section 3. Payroll tax deferral refers to the deferral of the employer share of Social
Security tax under section 2302 of the CARES Act. Source: Author’s calculations based on the population of
available Forms 941. These estimates do not include any amounts claimed on amended returns.

U.S. Department of the Treasury
Office of Tax Analysis 25
November 2021
Table 2: Subsidy takeup by industry

NAICS code Description Paid Leave Deferral ERTC

U.S. Department of the Treasury
2020Q22020Q4 2021Q12021Q2
0 Missing/Invalid Industry 0.023 0.010 0.001 0.010
11 Agriculture, Forestry, Fishing and Hunting 0.002 0.005 0.003 0.009

Office of Tax Analysis
21 Mining, Quarrying, and Oil and Gas Extraction 0.000 0.011 0.000 0.010
22 Utilities 0.001 0.022 0.004 0.015
23 Construction 0.002 0.005 0.002 0.007

November 2021
3133 Manufacturing 0.048 0.011 0.001 0.002
42 Wholesale Trade 0.015 0.003 0.001 0.005
4445 Retail Trade 0.005 0.003 0.000 0.007
4849 Transportation and Warehousing 0.001 0.000 0.001 0.008
51 Information 0.013 0.019 0.000 0.003
52 Finance and Insurance 0.002 0.003 0.004 0.013
53 Real Estate and Rental and Leasing 0.005 0.002 0.002 0.007
54 Professional, Scientific, and Technical Services 0.002 0.006 0.002 0.002
55 Management of Companies and Enterprises 0.000 0.054 0.002 0.001
56 Admin. and Support and Waste Mgmt. Services 0.002 0.001 0.001 0.006
61 Educational Services 0.009 0.009 0.004 0.003
62 Health Care and Social Assistance 0.009 0.004 0.002 0.010
71 Arts, Entertainment, and Recreation 0.014 0.002 0.010 0.024
72 Accommodation and Food Services 0.024 0.004 0.010 0.054
81 Other Services (except Public Administration) 0.002 0.004 0.002 0.004
92 Public Administration 0.046 0.027 0.009 0.025

Notes: This table reports the coefficient estimates from a regression of subsidy takeup on industry dummies, controlling for firm size fixed effects
interacted with quarter. In columns (1) and (2), the regression is pooled over the 2020Q22021Q1 period. Column (3) uses the 2020Q22020Q4 period,
while column 4 restricts to 2021Q12021Q2. The regression and uses the weights described in Section 3. The largest two estimates are bolded; the
smallest two estimates are reported in italics. Source: Author’s calculations based on the population of available Forms 941. These estimates do not
include any amounts claimed on amended returns.

26
Table 3: Share of takeup explained by fixed effects

Adjusted R2 for takeup of...
Paid leave credits Deferral ERTC
Quarter fixed effects 0.003 0.009 0.004
Add interaction with firm size fixed effects 0.174 0.107 0.011
Add interaction with 3digit NAICS 0.207 0.148 0.031
Add interaction with 6digit NAICS 0.230 0.165 0.042
Add preparer fixed effects 0.227 0.167 0.093

Notes: This table reports the adjusted R2 for a regression of takeup on successively more thorough sets of fully
interacted fixed effects. Each row adds an interaction to the set of fixed effects in the prior row (except for the 6digit
NAICS, which replaces the 3digit NAICS interaction). The regression uses the weights described in Section 3.
Source: Author’s calculations based on the population of available Forms 941. These estimates do not include any
amounts claimed on amended returns.

Table 4: ERTC takeup by in 2021Q1 in restaurant industry under preparer counterfactuals

Counterfactual takeup
Baseline 0.086
Replace below median 0.090
Replace below 75th p’tile 0.096
Replace below 90th p’tile 0.503

Notes: This table reports 2021Q1 takeup rates in the restaurant industry under various counterfactuals. Row 1
reports the estimated amount of takeup actually observed. The second row reports the estimated amount of take
up as if all belowmedian preparers (including selfprepared returns) were replaced with the median preparer, as
measured in a regresion of takeup on preparer fixed effects, controlling for state, firm size, and sixdigit NAICS
code. Rows 3 and 4 repeat the same exercise at the 75th and 90th percentiles respectively. The regression is
estimated restricting the data to 2021Q1 and uses the weights described in Section 3. Source: Author’s calculations
based on the population of available Forms 941. These estimates do not include any amounts claimed on amended
returns.

U.S. Department of the Treasury
Office of Tax Analysis 27
November 2021
Appendix

Figure A1: Average weight as a function of firm size

2.5

Average weight

1.5 2

1
1 3 10 30 100 300 1000 3000 10000
Number of employees (log scale)

2020Q2−2020Q4 2021Q1
2021Q2 (ERTC) 2021Q2 (FFCRA)

Notes: This figure plots the mean value of the weights, as a function of employee size, separately for 2020Q2
2020Q4, 2021Q1, 2021Q2 (ERTC), and 2021Q2 (paid leave credits). For the sake of readibility, all firms with over
10,000 employees are coded as having 10,000 employees. Source: Author’s calculations based on the population
of available Forms 941.

U.S. Department of the Treasury
Office of Tax Analysis 28
November 2021
Figure A2: Takeup of paid leave credits by firm size, 2020Q22021Q2

Share with positive credit

.2 .3
.1

0
1 3 10 30 100 300 1000 3000
Number of employees (log scale)

Notes: This figure plots the probability that a given firmquarter (it) observation claimed a credit for paid family
or medical leave. The data is pooled over the 2020Q22021Q2 period and uses the weights described in Section
3. These estimates do not include any amounts claimed on amended returns. For the sake of readibility, all firms
with more than 3,000 employees are coded as having 3,000 employees in this figure. Source: Author’s calculations
based on the population of available Forms 941.

U.S. Department of the Treasury
Office of Tax Analysis 29
November 2021

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