COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. This article will describe what the ERC does, how it operates, and explain how to claim it.
For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.
What is the Employee Retention Credit? Employee Retention Credit 2023 Filing Deadline
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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features and Advantages
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The credit amount and percentage vary according to the time period in which it is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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. Employee Retention Credit 2023 Filing Deadline
- 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. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- 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.
Criteria for Eligibility
Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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.
- Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses qualify for ERC despite business suspensions or revenue decreases.
A government order may suspend a business, or even partially suspend it.
- 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
- The order will apply to any calendar month in 2020 or even 2021
Some examples of orders from the government that could cause a business to be suspended are:
- Orders to stay at home that prevent non-essential companies from operating
- Curfews are restrictions on the hours that certain businesses can operate
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- 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 nature and scope of the order and how it affects the operations of the business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The order’s impact on revenues and expenses
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 2019
- The gross receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019
Gross receipts 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 include the following:
- Sales of goods and services
- Interest, dividends rents royalties and annuities
- Contributions, gifts and grants Employee Retention Credit 2023 Filing Deadline
- Membership dues
- Gross revenue from businesses or trades
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- The same sources reported on your federal income tax form for 2019
Recovery Startup Business
The recovery startup business is one that:
- Start any new business or occupation after February 15, 2019,
- Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.
- Maximum credit per quarter: $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amounts Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC’s main influences are:
- How much of the employer’s income was affected in 2019 by the pandemic.
- How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
- How much did the employer pay each employee in health insurance?
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will review the forms and pay the money back to the 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 won’t be around forever. 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 has to spend the money efficiently and not waste. Employee Retention Credit 2023 Filing Deadline
The following information provides more details on the ERC credit and how it is calculated.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount varies depending on the time period for which it is 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|
The Number of Employees
The number of eligible employees will affect the calculation and definition of health insurance and qualified wages. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. This table summarizes thresholds and rules to determine the size of an employer for each 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 and Health Insurance Costs
Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.
The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit 2023 Filing Deadline
|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 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 will need to declare the qualified wages paid and the health insurance expenses paid for eligible employees. They must also report the credit claimed.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 also allows the employer to claim the ERC for current or future quarters. The employer can use Form 941 to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit 2023 Filing Deadline
- Any excess credit can be carried forward to the next quarter
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 11c to report the qualified wages and health insurance costs 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.
- Line 24 is the place to ask for an advance payment if you need it.
- 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.
You can find some helpful tips on how to fill out Form 941 here:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- For clarifications or help, you can contact the IRS.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Employee Retention Credit 2023 Filing Deadline
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 to explain your corrections or adjustments on Form 941.
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 to report any refund or credit requested due to claiming the 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:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Credit 2023 Filing Deadline
- After making a correction or finding an error, you should file Form 941X.
- 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
Form 941 must be filed by the last date of the month that follows the end each quarter. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. The employer can still file Form 941 if they have deposited their taxes on time. After the end of the quarterly period. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit 2023 Filing Deadline
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.
Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.
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 is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. If you need clarification or assistance, you can contact the IRS.
The ERC is a great tool for both your business and employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thank you for reading. Stay safe.
Employee Retention Credit 2023 Filing Deadline
What is the ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
It was created in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).
Can everyone apply for ERC?
ERCs are not available to all. 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.
More details are available above. But here are some of the highlights.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- 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.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much does the ERC cost?
The amount of ERC that a company will receive depends on a number of 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. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim 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.
When is the deadline to submit the ERC form?
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
The deadline for Form 941 is usually the last day in the month after the end of every quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. This can also be up to two years, based on the date when the tax is paid.