COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. 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? Ct 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’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
- 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 the limit vary depending on the time period for which the credit is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Ct Employee Retention Credit
- 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.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. By submitting Form 7020, employers can request an early payment of their credit.
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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order has a direct impact on the operations of an organization or business
- Order applies to any calendar year in 2020 or 21
Some examples of orders from the government that could cause a business to be suspended are:
- Stay-at-home orders that restrict non-essential businesses from operating
- Certain businesses have curfews that limit their hours of operations
- Limits in capacity that restrict the number or clients that a business can serve
- Travel bans or restrictions that affect the ability of a business to transport goods or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The scope and nature of the order as well as how it impacts the business.
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The impact and magnitude of the order to the business’s revenues and costs
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 from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 2019.
Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts include:
- Sales of Goods & Services
- Interest, dividends rents royalties and annuities
- Donations, contributions, grants and gifts Ct Employee Retention Credit
- Membership dues
- Gross profits from trades and 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
- 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
- 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.
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit available per quarter is $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and 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.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- How much the employer paid to each employee and their health insurance during the pandemic
To receive the ERC, employers must submit forms to the IRS. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.
The ERC will no longer be available. The ERC started in March 2020 and ends in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. Ct Employee Retention Credit
Below you will find detailed information on ERC, including the amount of credit and the calculation.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The amount of credit depends on the time frame for which it’s 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|
The Number of Employees
The number and type of employees can affect the definition and calculation for qualified wages and health care costs. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 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)
Qualified Wages and Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. This table summarises the rules and provides examples for various scenarios. Ct 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 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. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use Form 941 to:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Ct Employee Retention Credit
- Carry forward any excess credits to future quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Line 13f should be used to report any advance payments made by the IRS.
- If you need to receive an advance payment, use Line 24.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
Some tips and resources for filling out Form 941 are:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- For clarifications or help, you can contact the IRS.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X allows employers to claim ERC retroactively. Form 941-X can be used by the employer to: Ct Employee Retention Credit
- 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.
- The amount of credit claimed will be affected by any mistakes or omissions in 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 941-X which reflects all the updates and changes made to the ERC by new laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to claim any additional credit for each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
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 Ct Employee Retention Credit
- After making a correction or finding an error, you should file Form 941X.
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- 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 is due by April 30, 2021. The employer can still file Form 941 if they have deposited their taxes on time. The following quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Ct Employee Retention Credit
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. 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 (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.
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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs are a powerful tool that can help your company or organization, as well as 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 should have helped you learn more about ERCs and how to apply for them. Thanks for reading and please stay safe.
Ct Employee Retention Credit
What is an ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Is everyone eligible for the ERC?
The ERC is not available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
Below are some details about eligibility.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
- 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.
How much is the ERC?
The amount of ERC an organization or business receives depends on several factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. If you want a more detailed explanation, read the above article.
How to claim ERC
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.
When is the Deadline for Filing the ERC Forms?
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
The last day to submit Form 941 for each quarter is the last calendar month. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. This can also be up to two years, based on the date when the tax is paid.