COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. 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.
In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some payroll costs.
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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.
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 the Employee Retention Credit? 941 Worksheet 1 Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.
The Main Features and Benefits
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The percentage and limit will vary depending on when the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. 941 Worksheet 1 Employee Retention Credit
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. Employers can request an advance payment by submitting Form 7200.
To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 2020 or 2021
- Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period 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 qualify for ERC despite business suspensions or revenue decreases.
A business or organization is considered fully or partially suspended by a government order if:
- The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order affects the operations of the business or organization
- The order applies to any calendar quarter in 2020 or 2021
These are some examples:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- Certain businesses are subject to curfews which limit their hours of operation
- Limits to the number of clients or customers that a company can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The order’s impact on revenues and expenses
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 2019
- The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.
Gross receipts are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts are:
- Sales of Goods and Services
- Interest, dividends, rents, royalties, and annuities
- Gifts, donations, and contributions 941 Worksheet 1 Employee Retention Credit
- Membership fees and dues
- Gross income from trades or businesses
To compare gross revenues for different quarters an employer can use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
Recovery startup businesses are those 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.
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery Startup Businesses are still subject to some restrictions and special rules.
- The maximum credit available per quarter is $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is affected by the following main factors:
- 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
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will then check the forms before giving the money to employers. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.
The ERC won’t be around forever. The ERC began in March 2020, and it will end in September 2022. Employers must claim their ERC before they expire or become unavailable. Employers must also use the money well and not waste it. 941 Worksheet 1 Employee Retention Credit
The following information provides more details on the ERC credit and how it is calculated.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount varies depending on the time period for which it is 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|
Number of Employees
The number affects the calculation of qualified wages for employees and their health insurance costs. The size of an employer depends on its number of FTEs and the time period. The following table summarizes rules and thresholds to determine employer size.
|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)
Qualified Wages and Health Insurance Costs
Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. 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 table below summarizes rules and examples in different scenarios. 941 Worksheet 1 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|
Claiming and Reporting the Credit
To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 is used by employers to:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit 941 Worksheet 1 Employee Retention Credit
- Carry forward any excess credit to subsequent quarters
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the latest version 941 which reflects updates and changes in the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f for any advance payment received from IRS.
- Line 24 is the place to ask for an advance payment if you need it.
- Report any credit balance that may be carried forward into the next quarter using Line 25
- Sign and date Form 941 and attach any supporting documents or schedules
The following are some resources and tips for filling in Form 941.
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- For clarifications or help, you can contact the IRS.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer may use Form 941 to: 941 Worksheet 1 Employee Retention Credit
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 to claim any additional credit for each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Attach any supporting documents and schedules to Form 941-X.
The following are some resources and tips for filling in Form 941X.
- You must file a separate 941X form for each quarter you are correcting or adjusting. 941 Worksheet 1 Employee Retention Credit
- After making a correction or finding an error, you should file Form 941X.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. 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. Following the end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. 941 Worksheet 1 Employee Retention Credit
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.
Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.
The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. 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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. If you need clarification or assistance, you can contact the IRS.
The ERC can make a big difference for your business or organization and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Stay safe and thank you for reading.
941 Worksheet 1 Employee Retention Credit
What is the ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
It was created in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).
Does everyone qualify for the ERC program?
Not everyone is eligible for the ERC. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
More details are available above. But here are some of the highlights.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar 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 ERC received by a business or organization will depend upon several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. For a detailed explanation of ERC, you can read the article mentioned above.
How do I claim my 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 deadline for Form 941 is usually the last day in the month after the end of every quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. This can also be up to two years, based on the date when the tax is paid.