COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
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 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? Employee Retention Credit 2023 Application
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way 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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
The 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. 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, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit 2023 Application
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- 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.
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 2020 or 2021
- The employer’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for the same quarter in 2019
Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses may qualify for ERC regardless of revenue or business suspension.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits commerce, travel, or group meetings 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
These are some examples:
- Stay-at-home orders restricting non-essential business operations
- Businesses are restricted in their operating hours by curfews
- Capacity limits that reduce the number of customers or clients that can be served by a business
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine if the business was partially or fully suspended by an official order, employers 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 order’s impact on revenues and expenses
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts consist of:
- Sales of goods & services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions, gifts and grants Employee Retention Credit 2023 Application
- Membership dues
- Gross revenue from businesses or trades
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
The recovery startup business is one that:
- You must have started your business after the 15th of February 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.
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. There are certain limitations and rules that apply to recovery startups businesses.
- Maximum credit per quarter: $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amounts and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is affected by the following main factors:
- How much business income dropped compared to 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 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 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 verify the forms, and then give the money to your employer. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
The ERC will no longer be available. It started in March 2020 and will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. Employers must also use the money well and not waste it. Employee Retention Credit 2023 Application
The following information provides more details on the ERC credit and how it is calculated.
The ERC was implemented, amended, or terminated by various laws in 2020. The amount of the credit varies according to the time period that it is applied for. 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. 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 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, 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 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. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit 2023 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|
Claim the Credit and Report It
For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
Form 941 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 allows the employer to do:
- ERC reduces taxes that employers have to deposit at the IRS.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit 2023 Application
- 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 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f to declare any advance payments received from the IRS.
- Use Line 24 to request an advance payment of the credit if needed
- Report any credit balance that may be carried forward into the next quarter using Line 25
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
Tips and resources on how to complete Form 941 include:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- Contact the IRS or a tax professional for assistance or clarification if needed
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer may use Form 941 to: Employee Retention Credit 2023 Application
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the 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 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Use Line 25 to claim any additional credit for each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Sign and date the Form 941 X and add any supporting documents or schedules.
You can find some helpful tips on how to fill out the Form 941-X here:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit 2023 Application
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
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 is due by April 30, 2021. 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 quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit 2023 Application
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 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.
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, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. 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.
ERC can have a significant impact on your business, organization, and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article aims to provide you with more information about the ERC. We thank you for reading. Please stay safe.
Employee Retention Credit 2023 Application
What is ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Is everyone eligible for the ERC?
ERC isn’t 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-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter in 2019.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
How much does the ERC cost?
The amount of ERC a company or organization receives will depend on several factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. The article above provides a detailed explanation on how ERC is calculated.
How do I claim my 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 declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
What is the deadline for submitting the ERC forms?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
Form 941 deadline is typically the last of the month following each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It is also possible to choose a date of two years following the date on which the tax was paid.