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.
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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 explain the ERC, how it functions, and how you can 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 the Employee Retention Credit? Do Owner Wages Count For 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 is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features and Advantages
- 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. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Do Owner Wages Count For Employee Retention Credit
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. Employers can also request an advance payment of the credit by filing Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:
- The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
- 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
In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. 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 prohibits travel, group meetings, and commerce due to COVID-19
- The order affects the operations of the business or organization
- The order will apply to any calendar month in 2020 or even 2021
Examples of government orders which can lead to a suspension of business include:
- Orders to stay at home that prevent non-essential companies from operating
- Businesses are restricted in their operating hours by curfews
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Bans on travel or restrictions on the ability to transport goods or service by a business
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The order’s nature, scope, and impact on 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 a significant decrease in gross revenue if a business has:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter 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 amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts are:
- Sales of goods & services
- Dividends (rents), royalties and interest
- Gifts, donations, and contributions Do Owner Wages Count For Employee Retention Credit
- Membership dues
- Gross income from trades or businesses
To compare gross revenues for different quarters an employer can use:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- 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 income that it reported on its federal income tax return for 2019
Recovery Startup Business
A startup that is in recovery can be defined as
- Began carrying on any trade or business after February 15, 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.
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum amount of credit per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC’s main influences are:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- How much did the employer pay each employee in health insurance?
Employers must complete and send IRS forms to claim ERC. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will then check the forms before giving the money to employers. 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 ERC before the expiration date or when it becomes unavailable. The employer also has to use the money wisely and not waste it. Do Owner Wages Count For Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. 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. 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 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 wages are wages paid to eligible employees during a period of business suspension or revenue decline. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. This table summarises the rules and provides examples for various scenarios. Do Owner Wages Count For 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
For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). 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. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 can be used by the employer 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 Do Owner Wages Count For Employee Retention Credit
- You can carry forward any credit balance to subsequent quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the latest version 941 which reflects updates and changes in 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 for the credit claim amount per quarter
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 to request an advance payment of the credit if needed
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign the form 941, and attach any supporting documents.
The following are some resources and tips for filling in Form 941.
- Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
- The IRS website has updated FAQs on the ERC and Form 941.
- If you need clarification or assistance, contact the IRS or an accountant.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941 X also allows for the employer to claim ERC retroactively. The employer may use Form 941 to: Do Owner Wages Count For Employee Retention Credit
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- 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.
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Sign and date Form 941-X and attach any supporting documents or schedules
Some tips and resources for filling out Form 941-X are:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Do Owner Wages Count For Employee Retention Credit
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. After the end of the quarterly period. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Do Owner Wages Count For Employee Retention Credit
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
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 can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC can make a big difference for your business or organization and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thank you for reading, and stay safe.
Do Owner Wages Count For Employee Retention Credit
What is ERC and what does it do?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
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?
The ERC is not available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
Below are some details about eligibility.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- 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.
- These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.
How much does the ERC cost?
The amount of ERC an organization or business receives depends on 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?
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 ERC’s deadline?
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. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. This can also be up to two years, based on the date when the tax is paid.