The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
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? Bottom Line Concepts Employee Retention Credit
Employee Retention Tax Credit (ERC), is a refundable tax credit for organizations and businesses with employees who have been 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’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features and Benefits
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Bottom Line Concepts Employee Retention Credit
- The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- 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 also request an advance payment of the credit by filing Form 7200.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
- 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
There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses may qualify for ERC regardless of revenue or business suspension.
A government order may suspend a business, or even partially suspend it.
- The order restricts commerce, travel or group meetings because of COVID-19
- The order affects the operations of the business or organization
- Order applies to any calendar year in 2020 or 21
Examples of government orders which can lead to a suspension of business include:
- Stay-athome orders restrict non-essential enterprises 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 restrictions or bans that impact the ability of an organization to transport goods and services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The order’s nature, scope, and impact on the business
- The duration and frequency of the order and how it coincides with the calendar quarters
- 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 can include:
- Sales of goods and Services
- Interest, dividends rents royalties and annuities
- Contributions, gifts, grants, and donations Bottom Line Concepts Employee Retention Credit
- Membership dues
- Gross income from trades or businesses
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 calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
Recovery startup businesses are those that:
- Start any new business or occupation after February 15, 2019,
- 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
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery startups are not exempt from certain rules and restrictions.
- The maximum credit available per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount Calculation
There are different ERC rules and amounts for different employers and periods of time. The main factors that affect the ERC are:
- How much of the employer’s income was affected in 2019 by the pandemic.
- What number of employees did the employer have in 2019 and 2020/2021?
- How much the employer paid to each employee and their health insurance during the pandemic
The employer has to fill out some forms and send them to the IRS to claim the ERC. 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 check the forms and give the money to the employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
ERCs are not available forever. The ERC started in March 2020 and ends in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. Employers must also use the money well and not waste it. Bottom Line Concepts Employee Retention Credit
Here is more information about the ERC and its calculation.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount varies depending on the time period for which it is claimed. The table below summarises key features and differences for the ERC in each time frame:
|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 employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. 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 table below summarizes the rules and thresholds for determining employer size in 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)
Qualified Wages, Health Insurance Costs
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. 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 of qualified wages, health insurance costs and employer size depends on the time period. The following table provides a summary of the rules for different scenarios. Bottom Line Concepts 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 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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use the Form 941 for:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Bottom Line Concepts Employee Retention Credit
- Carry forward any excess credits to future quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d to declare the credit amount claimed for each quarter
- Line 13f is used to report any advance payment of credit received by the 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, attaching any supporting documents, schedules, or schedules.
You can find some helpful tips on how to fill out Form 941 here:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- Need clarification? Contact an IRS agent or tax professional.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. The Form 941X allows the employer retroactively to claim ERC for previous quarters. Employers can use Form 941/X for Bottom Line Concepts Employee Retention Credit
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correction of errors or omissions on Form 941 which affect credit amount claimed
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- The IRS has provided worksheets to help you calculate the ERC.
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- 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.
- Attach any supporting documents and schedules to Form 941-X.
You can find some helpful tips on how to fill out the Form 941-X here:
- Fill out a separate form 941-X per quarter being corrected or recalculated Bottom Line Concepts 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.
- Need clarification? Contact an IRS agent or tax professional.
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 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. The end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Bottom Line Concepts Employee Retention Credit
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
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 (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. 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.
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 will not be available indefinitely, and it has a set deadline and statute of limitations. 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. For clarifications or help, you can always contact an IRS agent or tax professional.
The ERC can make a big difference for your business or organization and your employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from 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.
Bottom Line Concepts Employee Retention Credit
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 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?
ERCs are not available to all. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
Below are some details about eligibility.
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
What is the ERC worth?
The amount of ERC that a company will receive depends on a number of factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. To learn more about how ERCs are calculated, please read the article.
How to claim ERC
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
When is the deadline to file the ERC Forms
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
For Form 941 is generally the last day of the month following the end of each quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.