The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. 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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.
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? Employee Retention Credit 2023 Eligibility Flowchart
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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
Main Features and Benefits
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. 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. Employee Retention Credit 2023 Eligibility Flowchart
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.
To qualify for Employee Retention credit (ERC), employers must meet either of two main 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.
- The employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
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 may qualify for ERC regardless of revenue or business suspension.
A government order will either fully or partially suspend an organization or business if:
- The order limits commerce, travel, or group meetings due to COVID-19
- The order has an impact on the business or organization
- This order is applicable to any calendar quarter of 2020 or 2021
These are some examples:
- Orders to stay at home that prevent non-essential companies from operating
- Certain businesses have curfews that limit their hours of operations
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
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 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 are:
- Sales of goods and services
- Dividends (rents), royalties and interest
- Contributions are gifts, donations and grants Employee Retention Credit 2023 Eligibility Flowchart
- Membership dues
- Gross profits from trades and businesses
Employers must use the following formulas to calculate gross receipts and compare them between quarters.
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
- The same sources of income that it reported on its federal income tax return for 2019
Recovery Startup Business
The recovery startup business is one that:
- You must have started your business after the 15th of February 2020
- 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
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.
- The maximum credit per quarter will be $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is primarily affected by:
- How much an employer’s company was affected 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
- What the employer paid each employee for their health insurance and during the pandemic
Employers must complete and send IRS forms to claim ERC. 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 verify the forms, and then give the money to your employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC will not be available indefinitely. The ERC began in March 2020, and it will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. Employee Retention Credit 2023 Eligibility Flowchart
The following information provides more details on the ERC credit and how it is calculated.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of credit depends on the time frame for which it’s claimed. The following table summarizes and compares the ERC’s main features for each 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. 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 paid to eligible employees during a period of business suspension or revenue decline. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and 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. Employee Retention Credit 2023 Eligibility Flowchart
|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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 is used by employers to:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit 2023 Eligibility Flowchart
- Any excess credit can be carried forward to the next quarter
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest version 941 which reflects updates and changes in the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d when reporting the credit for each quarter.
- Line 13f should be used to report any advance payments made by the IRS.
- Line 24 is the place to ask for an advance payment if you need it.
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign the form 941, and attach any supporting documents.
Here are some tips and resources to help you fill out Form 941:
- Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The employer can also claim the ERC retroactively by using Form 941X. The employer may use Form 941 to: Employee Retention Credit 2023 Eligibility Flowchart
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
- Correction of errors or omissions on Form 941 which affect credit amount claimed
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
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- 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 for any additional credit claimed each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Attach any supporting documents and schedules to Form 941-X.
You can find some helpful tips on how to fill out the Form 941-X here:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit 2023 Eligibility Flowchart
- After making a correction or finding an error, you should file Form 941X.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. Following the end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit 2023 Eligibility Flowchart
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is 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. 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 is not available forever and has a deadline and a statute of limitations for claiming it. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can contact the IRS for help or clarification, or you could consult a tax expert.
ERCs are a powerful tool that can help your company or organization, as well as your employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. This article aims to provide you with more information about the ERC. Thanks for reading and please stay safe.
Employee Retention Credit 2023 Eligibility Flowchart
What is the ERC?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
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).
Are all ERC applicants eligible?
Not everyone is eligible for the ERC. 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.
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
How much does the ERC cost?
The amount of ERC that a company will receive depends on a number of factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim ERC
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform 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.
When is ERC’s deadline?
The deadlines for filing Forms 941 and 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. It is also possible to choose a date of two years following the date on which the tax was paid.