Employee Retention Credit.

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. 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 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. 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.

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 established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.

Main Features & Benefits

Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
The percentage and limit will vary depending on when the credit is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $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.
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. For 2023 only, employers that are classified as recovery startup business can claim the credit.
Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. By submitting Form 7020, employers can request an early payment of their credit.

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Criteria for Eligibility

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

The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period in 2019.

A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses may qualify for ERC regardless of revenue or business suspension.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

The order prohibits travel, group meetings, and commerce due to COVID-19
The order will affect the operation of the business or the organization
The order applies to any calendar quarter in 2020 or 2021

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

Orders to stay at home that prevent non-essential companies from operating
Businesses are restricted in their operating hours by curfews
Limits to the number of clients or customers that a company can serve
Travel restrictions or bans that impact the ability of an organization to transport goods and services

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

The scope and nature of the order as well as how it impacts the business.
The length, frequency, and timing of the order in relation to the quarters of the year.
The magnitude and impact of the order upon the revenue and expenses of a business

Revenue Drop

A business or organization is considered to have experienced a significant decline in gross receipts 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 revenue for any quarter of 2021 was less than 80% that for the same period in 2019.

Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. 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.
Membership dues
Gross profit from business or trade

To compare gross revenues for different quarters an employer can use:

The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
The same sources reported on your federal income tax form for 2019

Recovery Startup Business

A recovery startup business is a business that:

Began carrying on any trade or business after February 15, 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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.

The maximum credit available per quarter is $50,000
The credit is only applicable to wages paid for the third and fourth quarters of 2021
The credit is subject to an overall cap of $250 million for all recovery startup businesses

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Credit Amount and Calculation

ERC amounts and rules vary for different time periods and employers. 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.
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
How much each employee received from their employer and how they were covered by health insurance in 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 verify the forms, and then give the money to your employer. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.

The ERC is not available forever. The ERC will expire in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit.

You can find more information below on ERC calculation and credit amount.

Time Period

The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. 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 employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. 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. This table summarizes thresholds and rules to determine the size of an employer for each 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 wages include health insurance costs for eligible employees such as co-pays and deductibles.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit.

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 the Credit and Report It

The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. The employer will need to declare the qualified wages paid and the health insurance expenses paid for eligible employees. They must also report the credit claimed.

Form 941

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

ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit.
Carry forward any excess credits to future quarters

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

Use the latest version 941 which reflects updates and changes in the ERC.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 1c to report on the health insurance and wages that eligible employees have received.
Use Line 13d to declare the credit amount claimed for each quarter
Line 13f is used to report any advance payment of credit received 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.

You can find some helpful tips on how to fill out Form 941 here:

Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941 X also allows for the employer to claim ERC retroactively. Form 941-X can be used by the employer to: Employee Retention Credit.

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.

The employer should:

Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
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 to explain your corrections or adjustments 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 to report any refund or credit requested due to claiming the ERC
Sign and date Form 941-X and attach any supporting documents or schedules

You can find some helpful tips on how to fill out the Form 941-X here:

For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit.
After making a correction or finding an error, you should file Form 941X.
You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
For clarifications or help, you can contact the IRS.

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, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. The employer can still file Form 941 if they have deposited their taxes on time. After the end quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit.

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 2020 (January – March), for example, Form 941 is due on April 30, 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.

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Conclusion

Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.

The ERC (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. The ERC 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.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.

ERCs can be a huge help to your organization or business and its employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thanks for reading and please stay safe.

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Employee Retention Credit.

What is the 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).

Is everyone eligible for the ERC?

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.

Below are some details about eligibility.

A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.

How much is the ERC?

The amount of ERC that a company will receive depends on a number of factors.

Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. To learn more about how ERCs are calculated, please read the article.

How to claim ERC?

To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.

Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.

When is ERC’s deadline?

The deadlines for filing Forms 941 and 941-X are different.

The last day for Form 941 in most cases is the last month following the end each quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 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.