Employee Retention Credit 2023 Qualifications

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 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 (ERC)? Employee Retention Credit 2023 Qualifications

The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 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

The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
The percentage and limit will vary depending on when the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Employee Retention Credit 2023 Qualifications
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 who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. Employers can request an advance payment by submitting Form 7200.

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Eligibility Criteria

To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.

The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.

Business Suspension

A government order may suspend a business, or even partially suspend it.

The order limits commerce, travel, or group meetings due to COVID-19
The order impacts the operations of a business or organization
Order applies to any calendar year in 2020 or 21

Examples of government orders which can lead to a suspension of business include:

Orders to stay at home that prevent non-essential companies from operating
Certain businesses are subject to curfews which limit their hours of operation
Limits in capacity that restrict the number or clients that a business can serve
Bans on travel or restrictions on the ability to transport goods or service by a business

To determine if the business was partially or fully suspended by an official order, employers must consider:

How the nature and scope and the order affect the operation of the business
The duration, frequency of the orders and their alignment with the four quarters calendar.
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

A significant decline in gross revenues is experienced by a business or organization if:

The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period 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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts include the following:

Sales of Goods and Services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Contributions, gifts, grants, and donations Employee Retention Credit 2023 Qualifications
Membership dues
Gross profits from trades and businesses

To compare gross receipts between different quarters of the year, employers must use:

The same method for accounting (cash-based or accrual-based) that was used to file the 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 reported on your federal income tax form for 2019

Recovery Startup Business

A recovery startup business is a business that:

Begun carrying on any business after February 15th, 2020
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

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

The maximum credit amount per quarter is $50,000
Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts Calculation

The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is affected by the following main factors:

The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
What number of employees did the employer have in 2019 and 2020/2021?
What the employer paid each employee for their health insurance and during the pandemic

In order to receive the ERC from the IRS, the employer will need to complete some forms. 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 check the forms and give the money to the employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.

The ERC will not be available indefinitely. The ERC began in March 2020, and it will end in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer should also make sure to not waste the money. Employee Retention Credit 2023 Qualifications

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

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of the credit varies according to the time period that it is applied for. The following table summarises the main features and differences between the ERCs of each time period:

Time Period	Law	Eligible Employers	Credit Rate	Qualified Wages
2020	CARES Act	Employers with business suspension or revenue decline of more than 50%	50% of qualified wages up to $10,000 per employee per year	Wages paid from March 13 to December 31, 2020
Q1-Q3 2021	CAA and ARPA	Employers with business suspension or revenue decline of more than 20%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from January 1 to September 30, 2021
Q3-Q4 2021 (Recovery Startup Business)	ARPA	Recovery startup businesses with average annual gross receipts of no more than $1 million,	70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),	Wages paid from July 1 to December 31, 2021,
Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	ARPA and IIJA	Employers with a revenue decline of more than 90%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from October 1, 2021, to September 30, 2022

Number of Employees

The number 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. 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 and Health Insurance Costs

Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. 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 calculation of qualified wages, health insurance costs and employer size depends on the time period. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit 2023 Qualifications

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 must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

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. The employer can also claim the ERC in Form 941 for future or current 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
You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit 2023 Qualifications
Carry over any excess credit into the following quarter

Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.

Use the latest version of Form 941 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 line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
Use Line 13d to declare the credit amount 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
You can report excess credit on Line 25 for the following quarters.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

Some tips and resources for filling out Form 941 are:

Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
The IRS website has updated FAQs on the ERC and Form 941.
You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

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 the Form 941 X to: Employee Retention Credit 2023 Qualifications

Claim refunds or credits for taxes overpaid due to the ERC
Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

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 for indicating which lines of the Form 941 need to be corrected or adjusted
Use Part 3 to explain the reason for a correction or adjustment on Form 941
Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
Line 25 should be used to declare any additional amount claimed as a credit each quarter
Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
Sign and date Form 941-X and attach any supporting documents or schedules

The following are some resources and tips for filling in Form 941X.

For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit 2023 Qualifications
File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
You can also contact a tax expert or the IRS for clarification or additional assistance.

Deadline and Statute of Limitations

Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. After the end of the quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit 2023 Qualifications

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 the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.

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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, 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.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. 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 will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thank you for reading. Stay safe.

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Employee Retention Credit 2023 Qualifications

What is an ERC?

Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.

The CARES Act created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.

Does everyone qualify for the ERC program?

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.

You can read more about the criteria here. Here are some highlights.

A government order imposed a suspension (full or partial) on the business or organization 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.
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.

What is the ERC rate?

The amount of ERC a company or organization receives will depend on several factors.

Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.

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 report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

When is the deadline to submit the ERC form?

There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).

Form 941 deadline is typically the last of the month following each quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.