Employee Retention Credit 2023 Irs

The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.

The ERC was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation 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 Irs

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 aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

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, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. 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 Irs
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.
The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. By submitting Form 7020, employers can request an early payment of their credit.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.

The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 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.

Business Suspension

A government order will either fully or partially suspend an organization or business if:

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order has an impact on the business or organization
This order is applicable to any calendar quarter of 2020 or 2021

Here are some examples of government orders that can result in a business being suspended:

Stay-athome orders restrict non-essential enterprises from operating
Curfews are restrictions on the hours that certain businesses can operate
Capacity limits that reduce the number of customers or clients that can be served by a business
Travel bans or restrictions that affect the ability of a business to transport goods or services

An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.

The order’s nature, scope, and impact on the business
The duration and frequency of the order and how it coincides with the calendar quarters
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered a significant decrease in gross revenue if a business has:

The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar 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 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
Interest, dividends rents royalties and annuities
Contributions are gifts, donations and grants Employee Retention Credit 2023 Irs
Membership fees and dues
Gross income from trades or businesses

To calculate and compare gross receipts for different quarters, an employer must use:

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns for 2019.
The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
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:

After February 15, 2020, you can start any business or trade.
Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be determined

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery startups are not exempt from certain rules and restrictions.

The maximum amount of credit per quarter is $50,000
The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
The credit is subject to an overall cap of $250 million for all recovery startup businesses

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Credit Amount Calculation

There are different ERC rules and amounts for different employers and periods of time. The ERC’s main influences are:

How much business income dropped compared to 2019.
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
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 employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will verify the forms, and then give the money to your employer. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.

The ERC will not be available indefinitely. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer should also make sure to not waste the money. Employee Retention Credit 2023 Irs

Below you will find detailed information on ERC, including the amount of credit and the calculation.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. Credit amounts vary depending on when they are claimed. 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. 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 the thresholds and rules for determining the employer size for 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. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. 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. Employee Retention Credit 2023 Irs

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

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Claim and Report Credit

The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. 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

Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. Form 941 also allows the employer to claim the ERC for current or future quarters. The employer can use the Form 941 for:

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 Irs
Carry forward any excess credits to future quarters

To avoid making common errors and fill out Form 941 correctly, employers should:

Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
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 to declare the credit amount claimed for each quarter
Use Line 13f for any advance payment received from IRS.
Use Line 24 to request a credit advance if necessary
Report any credit balance that may be carried forward into the next quarter using Line 25
Sign and date Form 941 and attach any supporting documents or schedules

Tips and resources on how to complete Form 941 include:

Use online services or electronic filing to submit Form 941 more quickly and securely
Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
Need clarification? Contact an IRS agent or tax professional.

Form 941-X

Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Employee Retention Credit 2023 Irs

Claim your refund or credit due to overpaid taxes by claiming 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.

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
For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 to explain your corrections or adjustments on Form 941.
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 refund or credit requested due to claiming the ERC
Sign and date Form 941, and attach any supporting documentation or schedules

Tips and resources on how to complete Form 941 X include:

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit 2023 Irs
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 to submit Form 941 is usually the last day in the month following each quarter. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. The following quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit 2023 Irs

Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 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 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.

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Conclusion

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 (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. If you need clarification or assistance, you can contact the IRS.

The ERC is a great tool for both your business and employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thanks for reading and please stay safe.

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Employee Retention Credit 2023 Irs

What is ERC and what does it do?

Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls 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.

Does everyone qualify for the ERC program?

ERC eligibility is not universal. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
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.
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 is ERC?

The amount ERC received by a business or organization will depend upon several factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. If you want a more detailed explanation, read the above article.

How do I claim my ERC?

To claim the ERC an employer must submit a federal employment reform (Form 941)-X or a revised employment tax return to the IRS.

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

What is the deadline for submitting the ERC forms?

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. 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.