The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.
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 Requirements
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees 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’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features & Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit 2023 Requirements
- 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 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.
- The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. Employers can request an advance payment by submitting Form 7200.
Criteria for Eligibility
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 2020 or 2021
- The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to 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
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 have curfews that limit their hours of operations
- 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:
- How the nature and scope and the order affect the operation of the business
- The length and frequency of your order and the way it corresponds to the calendar quarters
- The order’s impact on revenues and expenses
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- 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 revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts are:
- Sales of goods and services
- Interest, dividends, rents, royalties, and annuities
- Contributions, gifts and grants Employee Retention Credit 2023 Requirements
- Dues and fees for membership
- Gross business income
Employers must use the following formulas to calculate gross receipts and compare them between quarters.
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
The recovery startup business is one that:
- 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
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum credit available per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is affected primarily by:
- 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.
- How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will then check the forms before giving the money to employers. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
The ERC won’t be around forever. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer must also spend the money properly and not waste any of it. Employee Retention Credit 2023 Requirements
Below is more detailed information on the credit amount and calculation of ERC.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. 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. The size of an employer depends on its number of FTEs and the time period. The table below summarizes all the rules and thresholds that determine an employer’s 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)
Earnings and Costs of Health Insurance
Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. 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 calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit 2023 Requirements
|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 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. The employer can use Form 941 to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit 2023 Requirements
- Any excess credit can be carried forward to the next quarter
The employer should:
- 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 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d when reporting the credit for each quarter.
- Use Line 13f to report any advance payments of the credit received from the IRS
- Use Line 24 to request an advance payment of the credit if needed
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign and date Form 941, and include any supporting documents and schedules.
Some tips and resources for filling out Form 941 are:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- If you need clarification or assistance, contact the IRS or an accountant.
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 Requirements
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Line 25 is the place to enter any additional credit claims 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.
The following are some resources and tips for filling in Form 941X.
- Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit 2023 Requirements
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. After the end quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit 2023 Requirements
The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
Employee Retention (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.
The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. The ERC may be claimed through IRS Forms 941 and 941X, which require the employer to report the qualified wages paid and the health insurance expenses incurred by each employee.
If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If you need clarification or assistance, you can contact the IRS.
ERC can have a significant impact on your business, organization, and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Thank you for reading. Stay safe.
Employee Retention Credit 2023 Requirements
What is ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
The CARES Act 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).
Can everyone apply for ERC?
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.
More details are available above. But here are some of the highlights.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
How much is the ERC?
The amount of ERC that a company will receive depends on a number of 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 to claim the 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?
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
For Form 941 is generally the last day of the month following the end of each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.