The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.
The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. This article will describe what the ERC does, how it operates, and explain how to claim it.
For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.
What is Employee Retention Credit? 26000 Dollar Employee Retention Credit
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees affected by COVID-19. The ERC, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
The Main Features and Benefits
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. 26000 Dollar Employee Retention Credit
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers may also request an advanced payment of the credit using Form 7200.
Criteria for Eligibility
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
- The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.
Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses may qualify for ERC regardless of revenue or business suspension.
A government order will either fully or partially suspend an organization or business if:
- The order restricts commerce, travel or group meetings because of COVID-19
- The order has a direct impact on the operations of an organization or business
- The order applies to any calendar quarter in 2020 or 2021
Some examples of orders from the government that could cause a business to be suspended are:
- Stay-athome orders restrict non-essential enterprises from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The scope and nature of the order as well as how it impacts the business.
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The extent and severity of the impact of the order on the revenues and expenses of the business
It is considered a significant decrease in gross revenue if a business has:
- The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts include the following:
- Sales of goods and Services
- Interest, dividends rents royalties and annuities
- Donations, contributions, grants and gifts 26000 Dollar Employee Retention Credit
- Membership dues
- Gross business income
To calculate and compare gross revenue for different quarters using the following:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
The recovery startup business is one that:
- Begun carrying on any business after February 15th, 2020
- If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.
- Maximum credit per quarter: $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is primarily affected by:
- How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
- What number of employees did the employer have in 2019 and 2020/2021?
- How much did the employer pay each employee in health insurance?
The employer has to fill out some forms and send them to the IRS to claim the ERC. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC will not be available indefinitely. It started in March 2020 and will end in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. 26000 Dollar Employee Retention Credit
You can find more information below on ERC calculation and credit amount.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. Credit amounts vary depending on when they are claimed. The following table summarises the main features and differences between the ERCs of each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
The Number of Employees
The number affects the calculation of qualified wages for employees and their health insurance costs. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The following table summarizes the thresholds and rules for determining the employer size for each time period:
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Earnings and Costs of Health Insurance
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table summarizes the rules and examples for different scenarios: 26000 Dollar Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim and Report the Credit
To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 also allows the employer to claim the ERC for current or future quarters. Form 941 can be used by the employer to:
- ERC reduces taxes that employers have to deposit at the IRS.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. 26000 Dollar Employee Retention Credit
- Any excess credit can be carried forward to the next quarter
The employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
- Use Line 13d when reporting the credit for each quarter.
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 to request a credit advance if necessary
- Report any credit balance that may be carried forward into the next quarter using Line 25
- Sign the form 941, and attach any supporting documents.
Tips and resources on how to complete Form 941 include:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
The Form 941 X is used for corrections and adjustments to a Form 941. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer may use Form 941 to: 26000 Dollar Employee Retention Credit
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to claim any additional credit for each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
Here are some tips and resources to help you fill out Form 941X:
- You must file a separate 941X form for each quarter you are correcting or adjusting. 26000 Dollar Employee Retention Credit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following each quarter. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. 26000 Dollar Employee Retention Credit
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If you need clarification or assistance, you can contact the IRS.
ERC can have a significant impact on your business, organization, and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thanks for reading and please stay safe.
26000 Dollar Employee Retention Credit
What is an ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
The CARES Act created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.
Does everyone qualify for the ERC program?
The ERC is not available to everyone. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
You can read more about the criteria here. Here are some highlights.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
How much is the ERC?
The amount of ERC a company or organization receives will depend on several factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. To learn more about how ERCs are calculated, please read the article.
How to claim ERC?
To claim the ERC an employer must submit a federal employment reform (Form 941)-X or a revised employment tax return to the IRS.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
When is the Deadline for Filing the ERC Forms?
The deadlines for filing Forms 941 and 941-X are different.
The last day to submit Form 941 for each quarter is the last calendar month. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. This can also be up to two years, based on the date when the tax is paid.