Employee Retention Credit 280C

COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

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 has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. 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? Employee Retention Credit 280C

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 was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.

Main Features and Advantages

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 the maximum credit vary depending on how long the credit can be claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Employee Retention Credit 280C
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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
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 also request an advance payment of the credit by filing Form 7200.

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Eligibility Criteria

To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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
The employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.

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 business or organization is considered fully or partially suspended by a government order if:

The order limits travel, commerce or group meetings as a result of COVID-19
The order impacts the operations of a business or organization
The order applies to all calendar quarters in 2020 and 2021

Some examples of government orders that can cause a business suspension are:

Stay-at-home orders prohibiting the operation of non-essential businesses
Certain businesses have curfews that limit their hours of operations
Limits on the capacity of a business that limit how many customers or clients it can serve
Travel bans and restrictions that restrict the ability for a company to transport services or goods

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

The nature and scope of the order and how it affects the operations of the business
The length and frequency of your order and the way it corresponds to the calendar quarters
The impact of an order on revenue and expenses

Revenue Decline

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

The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter 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 include:

Sales of goods and services
Interest, dividends, rents, royalties, and annuities
Gifts, donations, and contributions Employee Retention Credit 280C
Membership dues
Gross profits from trades and businesses

Employers must use the following formulas to calculate gross receipts and compare them between quarters.

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
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

A recovery startup is a business:

Start any new business or occupation after February 15, 2019,
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined

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 per quarter will be $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 and Calculation

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

How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
What the employer paid each employee for their health insurance and during the pandemic

To receive the ERC, employers must submit forms to the IRS. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will check the forms and give the money to the employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.

The ERC will not be available indefinitely. The ERC began in March 2020, and it will end in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. Employers must also use the money well and not waste it. Employee Retention Credit 280C

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 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. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. The table below summarizes the rules and thresholds for determining employer size in 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)

Earnings and Costs of Health Insurance

Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The table below summarizes rules and examples in different scenarios. Employee Retention Credit 280C

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 the Credit

To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

Form 941

Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use Form 941 to:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit 280C
Carry over any excess credit into the following quarter

The employer should:

Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
Report the amount of credit claimed each quarter using Line 13d.
Line 13f should be used to report any advance payments made by the IRS.
Use Line 24 if you require an advance credit payment.
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign the form 941, and attach any supporting documents.

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.
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. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use Form 941-X to: Employee Retention Credit 280C

Claim a refund or credit for overpaid taxes due to claiming the ERC
Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on 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 version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
Use Part 3 for explaining why form 941 has been corrected or adjusted
Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
Line 25 should be used to declare any additional amount claimed as a credit each quarter
You can use Line 26 to request a refund or credit due to claiming ERC.
Attach any supporting documents and schedules to Form 941-X.

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 280C
You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
Need clarification? Contact an IRS agent or tax professional.

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. The employer can still file Form 941 if they have deposited their taxes on time. The following quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit 280C

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.

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Conclusion

Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.

The ERC is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. 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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. If 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 can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. We thank you for reading. Please stay safe.

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Employee Retention Credit 280C

What is the ERC?

Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.

It was created in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).

Who is 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.

A government-issued order temporarily or permanently suspended the organization or business 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.
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.

What is the ERC rate?

The amount that an organization or company receives in ERC will depend on many 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. You can read the article above for a more detailed explanation of how ERC is calculated.

How to claim your ERC?

To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.

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. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.