COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. 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 $26,000
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features and Advantages
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire 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 $26,000
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- 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 may also request an advanced payment of the credit using Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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
- 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.
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 may qualify for ERC regardless of revenue or business suspension.
An order of the government can suspend a business or an organization in full or part if it:
- The order limits commerce, travel, or group meetings due to COVID-19
- The order affects the operations of the business or organization
- The order will apply to any calendar month in 2020 or even 2021
These are some examples:
- Stay-athome orders restrict non-essential enterprises from operating
- Curfews that limit the hours of operation for certain businesses
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The scope and nature of the order as well as how it impacts the business.
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The impact and magnitude of the order to the business’s revenues and costs
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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts can include:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Gifts, donations, and contributions Employee Retention Credit $26,000
- Membership dues
- Gross profit from business or trade
To compare gross receipts between different quarters of the year, employers 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 reported on your federal income tax form for 2019
Recovery Startup Business
A startup that is in recovery can be defined as
- Began carrying on any trade or business after February 15, 2020,
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum amount of credit per quarter is $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 and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC is primarily affected 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 the employer paid to each employee and their health insurance during the pandemic
To receive the ERC, employers must submit forms to the IRS. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will check the forms and give the money to the 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 no longer be available. The ERC started in March 2020 and ends in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. Employee Retention Credit $26,000
You can find more information below on ERC calculation and credit amount.
The ERC was implemented, amended, or terminated by various laws in 2020. The credit amount varies depending on the time period for which it is claimed. The following table summarizes the key features and differences of the ERC for 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 affects the calculation of qualified wages for employees and their health insurance costs. 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 are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.
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. The table below summarizes rules and examples in different scenarios. Employee Retention Credit $26,000
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim and Report the 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 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 allows the employer also to claim ERCs in current or future quarters. Form 941 can be used by the employer to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention Credit $26,000
- You can carry forward any credit balance to subsequent quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d for the credit claim amount per 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 and date Form 941 and attach any supporting documents or schedules
You can find some helpful tips on how to fill out Form 941 here:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- Contact the IRS or a tax professional for assistance or clarification if needed
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. The employer can also claim the ERC retroactively by using Form 941X. The employer can use Form 941-X to: Employee Retention Credit $26,000
- 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
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date Form 941-X and attach any supporting documents or schedules
Here are some tips and resources to help you fill out Form 941X:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit $26,000
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- 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, for Q1 2021 (January-March), Form 941 is due by 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 of the quarterly period. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit $26,000
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. The ERC 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.
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 has a time limit and deadline for claiming. 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 you need clarification or assistance, you can contact the IRS.
The ERC can make a big difference for your business or organization and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading. Stay safe.
Employee Retention Credit $26,000
What is ERC and what does it do?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Is everyone eligible for the ERC?
The ERC is not available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
You can read more about the criteria here. Here are some 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.
- 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 the ERC?
The amount of ERC an organization or business receives depends on several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. To learn more about how ERCs are calculated, please read the article.
How to claim the ERC?
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
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 ERC’s deadline?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
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. It can be as late as two years after you paid the tax, but the later date is the preferred date.