COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
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 is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. 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? Accounting For Employee Retention Credit Deloitte
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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
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 credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Accounting For Employee Retention Credit Deloitte
- The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- 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.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:
- The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
- The employer’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for the same quarter in 2019
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order affects the operations of the business or organization
- This order is applicable to any calendar quarter of 2020 or 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-at-home orders that restrict non-essential businesses from operating
- Businesses are restricted in their operating hours by curfews
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel bans or restrictions that affect the ability of a business to transport goods or services
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The nature and scope of the order and how it affects the operations of the business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The extent and severity of the impact of the order on the revenues and expenses of the business
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
- The gross revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.
Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts can include:
- Sales of goods and Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Gifts, donations, and contributions Accounting For Employee Retention Credit Deloitte
- Membership fees and dues
- Gross business income
To compare gross receipts between different quarters of the year, employers must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A startup that is in recovery can be defined as
- Begun carrying on any business after February 15th, 2020
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startups are not exempt from certain rules and restrictions.
- The maximum credit per quarter will be $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC is primarily affected by:
- How much of the employer’s income was affected in 2019 by the pandemic.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- What the employer paid each employee for their health insurance and during the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
The ERC won’t be around forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer has to spend the money efficiently and not waste. Accounting For Employee Retention Credit Deloitte
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was implemented, amended, or terminated by various laws in 2020. The credit amount depends on the period for which you claim it. The following table summarizes the key features and differences of the ERC for 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 and type of employees can affect the definition and calculation for qualified wages and health care costs. The size of an employer depends on its number of FTEs and the time period. The table below summarizes all the rules and thresholds that determine an employer’s 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)
Earnings and Costs of Health Insurance
Qualified wages refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
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: Accounting For Employee Retention Credit Deloitte
|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 Credit
The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. 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 is used by employers to:
- ERC reduces taxes that employers have to deposit at the IRS.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Accounting For Employee Retention Credit Deloitte
- You can carry forward any credit balance to subsequent quarters
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
- Use Line 13d to declare the credit amount claimed for each quarter
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 to request an advance payment of the credit if needed
- You can report excess credit on Line 25 for the following quarters.
- Sign and date Form 941 and attach any supporting documents or schedules
Here are some tips and resources to help you fill out Form 941:
- Use online services or electronic filing to submit Form 941 more quickly and 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.
The Form 941 X is used for corrections and adjustments to a Form 941. Form 941 X also allows for the employer to claim ERC retroactively. Employers can use Form 941/X for Accounting For Employee Retention Credit Deloitte
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
- The IRS has provided worksheets to help you calculate the ERC.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 for any additional credit claimed each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Sign and date Form 941-X and attach any supporting documents or schedules
You can find some helpful tips on how to fill out the Form 941-X here:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Accounting For Employee Retention Credit Deloitte
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- For clarifications or help, you can contact the IRS.
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. Following the end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Accounting For Employee Retention Credit Deloitte
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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If an employer submitted Forms 941 on 30 April 2020 and the tax was paid on 30 April 2020, it is now April 2023 before they can file Forms 941-X. 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.
Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.
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 may be claimed through IRS Forms 941 and 941X, which require the employer to report the qualified wages paid and the health insurance expenses incurred by each employee.
If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC is a great tool for both your business and employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article should have helped you learn more about ERCs and how to apply for them. Stay safe and thank you for reading.
Accounting For Employee Retention Credit Deloitte
What is ERC and what does it do?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Can everyone apply for ERC?
ERCs are not available to all. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- 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.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
What is the ERC rate?
The amount ERC received by a business or organization will depend upon several factors.
Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. If you want a more detailed explanation, read the above article.
How to claim the ERC?
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
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 ERC’s deadline?
The deadlines of Form 941, Form 941X and ERC 941 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.