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.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. 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 (ERC)? Cares Act Employee Retention Credit Application
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 was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
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 limit will vary depending on when the credit is claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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. Cares Act Employee Retention Credit Application
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also 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. The credit can be requested in advance by employers using Form 7200.
Criteria for Eligibility
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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.
- Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in 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 qualify for ERC despite business suspensions or revenue decreases.
An order of the government can suspend a business or an organization in full or part if it:
- The order restricts commerce, travel or group meetings because of COVID-19
- The order impacts the operations of a business or organization
- The order will apply to any calendar month in 2020 or even 2021
Some examples of orders from the government that could cause a business to be suspended are:
- Orders to stay at home that prevent non-essential companies from operating
- Curfews are restrictions on the hours that certain businesses can operate
- 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 a business was fully or partially suspended by a government order, an employer must consider:
- The scope and nature of the order as well as how it impacts the business.
- The length and frequency of your order and the way it corresponds to the calendar quarters
- The impact of an order on revenue and expenses
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 receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019
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 & services
- Interest, dividends rents royalties and annuities
- Gifts, donations, and contributions Cares Act Employee Retention Credit Application
- Dues and fees for membership
- Gross revenue from businesses or trades
To calculate and compare gross revenue for different quarters using the following:
- It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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).
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
A recovery startup business is a business that:
- After February 15, 2020, you can start any business or trade.
- 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. There are certain limitations and rules that apply to recovery startups businesses.
- Maximum credit per quarter: $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- The maximum credit available for startup businesses is $250 million.
Credit Amount Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC’s main influences 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 did the employer pay each employee in health insurance?
To claim the ERC, the employer must fill out and submit a form to the IRS. 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 will no longer be available. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer must also spend the money properly and not waste any of it. Cares Act Employee Retention Credit Application
Below you will find detailed information on ERC, including the amount of credit and the calculation.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. Credit amounts vary depending on when they are claimed. The table below summarizes key differences and features of the ERCs 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 employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. 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 that eligible employees receive during periods of suspension or decline in revenue. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. This table summarises the rules and provides examples for various scenarios. Cares Act Employee Retention Credit Application
|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 used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use Form 941 to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Cares Act Employee Retention Credit Application
- Carry forward any excess credit to subsequent 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.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- 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.
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign the form 941, and attach any supporting documents.
Some tips and resources for filling out Form 941 are:
- Use online services or electronic filing to submit Form 941 more quickly and 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.
Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. The employer can also claim the ERC retroactively by using Form 941X. Form 941-X can be used by the employer to: Cares Act Employee Retention Credit Application
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting 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
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign and date Form 941-X and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 X include:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Cares Act Employee Retention Credit Application
- Fill out Form 941-X immediately after you find an error in Form 941
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- For clarifications or help, you can contact the IRS.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following each quarter. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. 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 following quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Cares Act Employee Retention Credit Application
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, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. 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 is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.
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 can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC has a time limit and deadline for claiming. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs can be a huge help to your organization or business and its employees. You can use it to retain employees, keep your cash flowing, and recover after a 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.
Cares Act Employee Retention Credit Application
What is the ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).
Can everyone apply for ERC?
The ERC is not available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, 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.
- 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.
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. You can read the article above for a more detailed explanation of how ERC is calculated.
How to claim the ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with 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.
What is the deadline for submitting the ERC forms?
The deadlines for filing Forms 941 and 941-X are different.
Form 941 deadline is typically the last of the month following each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It is also possible to choose a date of two years following the date on which the tax was paid.