Employee Retention Credit,

COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.

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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.

Main Features and Benefits

The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
The credit amount and percentage vary according to the time period in which it is claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. 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,
The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
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.
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 may also request an advanced payment of the credit using Form 7200.

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Eligibility Criteria

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

The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
The employer’s gross 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.

There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses may qualify for ERC regardless of revenue or business suspension.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order limits travel, commerce or group meetings as a result of COVID-19
The order affects the operations of the business or organization
This order is applicable to any calendar quarter of 2020 or 2021

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

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
Bans on travel or restrictions on the ability to transport goods or service by a business

Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:

The scope and nature of the order as well as how it impacts the business.
The order’s duration, frequency, and alignment with the calendar quarters
The impact and magnitude of the order to the business’s revenues and costs

Revenue Drop

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 revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.

Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts are:

Sales of Goods and Services
Interest, dividends rents royalties and annuities
Gifts, donations, and contributions Employee Retention Credit,
Membership dues
Gross profit from business or trade

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

Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
The same sources of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A recovery startup business is a business that:

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

It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startup businesses are subject to certain restrictions and special rules.

The maximum credit amount per quarter is $50,000
The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
All recovery startup businesses are subject to an aggregate cap of $250,000,000.

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Credit Amounts Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The ERC’s main influences are:

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
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

Employers must complete and send IRS forms to claim ERC. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.

ERCs are not available forever. The ERC started in March 2020 and ends in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer should also make sure to not waste the money. Employee Retention Credit,

The following information provides more details on the ERC credit and how it is calculated.

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 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 employed affects how wages are calculated and defined, as well as the health insurance premiums 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)

Earnings and Costs of Health Insurance

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 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,

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report Credit

The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. The employer must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 can be used by the employer to:

ERC – Reduce the amount the employer is required to pay in taxes.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit,
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.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
Use Line 13d to declare the credit amount claimed for each quarter
Use Line 13f to declare any advance payments received from the IRS.
Use Line 24 to request an advance payment of the credit if needed
Report any credit balance that may be carried forward into the next quarter using Line 25
Sign the form 941, and attach any supporting documents.

Tips and resources on how to complete Form 941 include:

Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use Form 941-X to: Employee Retention Credit,

Claim your refund or credit due to overpaid taxes by claiming the ERC
Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

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

Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
Use Part 3 to explain your corrections or adjustments on Form 941.
Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
Use Line 25 to report any additional amount of credit claimed for each quarter
Use Line 26 to report any credit or refund due to the ERC claim.
Attach any supporting documents and schedules to Form 941-X.

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

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit,
After making a correction or finding an error, you should file Form 941X.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
Contact the IRS or a tax professional for assistance or clarification if needed

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. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. Following the end of the quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit,

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 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 filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.

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Conclusion

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. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. 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. You can also contact the IRS or a tax professional for assistance or clarification if needed.

ERCs are a powerful tool that can help your company or organization, as well as 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.

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Employee Retention Credit,

What is the ERC?

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

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).

Are all ERC applicants eligible?

Not everyone is eligible for the ERC. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.

Below are some details about eligibility.

The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
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.
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 ERC?

The amount that an organization or company receives in ERC will depend on many factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. If you want a more detailed explanation, read the above article.

How do I claim my 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.

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

When is the deadline to submit the ERC form?

The deadlines for filing ERC forms for Forms 941 and form 941 X are different.

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.