The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around 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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 2023. 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 Employee Retention Credit? Employee Retention Credit 4Th Quarter 2023 Reinstatement
Employee Retention Tax Credit (ERC), is a refundable tax credit for organizations and businesses with employees who have been 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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features & Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- 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. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit 4Th Quarter 2023 Reinstatement
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- 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. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. Employers can request an advance payment by submitting Form 7200.
To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
- The employer’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for the same quarter in 2019
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 can qualify for the ERC regardless of business suspension or revenue decline.
A government order will either fully or partially suspend an organization or business if:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order will affect the operation of the business or the organization
- The order will apply to any calendar month in 2020 or even 2021
These are some examples:
- Orders to stay at home that prevent non-essential companies from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
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 and frequency of the order and how it coincides with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 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 are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts can include:
- Sales of goods and services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Gifts, donations, and contributions Employee Retention Credit 4Th Quarter 2023 Reinstatement
- Membership dues
- Gross revenue from businesses or trades
To compare gross receipts between different quarters of the year, employers must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A recovery startup is a business:
- 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
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery Startup Businesses are still subject to some restrictions and special rules.
- The maximum credit per quarter will be $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amounts and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is primarily affected by:
- How much of the employer’s income was affected in 2019 by the pandemic.
- What number of employees did the employer have in 2019 and 2020/2021?
- How much the employer paid to each employee and their health insurance during the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will review the forms and pay the money back 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 is not available forever. The ERC began in March 2020, and it will end 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 4Th Quarter 2023 Reinstatement
Below is more detailed information on the credit amount and calculation of ERC.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount varies depending on the time period for which it is claimed. The table below summarizes key differences and features of the ERCs 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 and type of employees can affect the definition and calculation for qualified wages and health care 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 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)
Qualified Wages and Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The 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 following table provides a summary of the rules for different scenarios. Employee Retention Credit 4Th Quarter 2023 Reinstatement
|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 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 report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. The employer can also claim the ERC in Form 941 for future or current quarters. 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 4Th Quarter 2023 Reinstatement
- Carry over any excess credit into the following quarter
The employer should:
- Use the latest version 941 which reflects updates and changes in the ERC.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d when reporting the credit for each quarter.
- Line 13f is used to report any advance payment of credit received by the IRS
- If you need to receive an advance payment, use Line 24.
- You can report excess credit on Line 25 for the following quarters.
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
Some tips and resources for filling out Form 941 are:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- For clarifications or help, you can contact the IRS.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941-X allows employers to claim ERC retroactively. Form 941-X can be used by the employer to: Employee Retention Credit 4Th Quarter 2023 Reinstatement
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Sign and date Form 941, and attach any supporting documentation or schedules
Some tips and resources for filling out Form 941-X are:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit 4Th Quarter 2023 Reinstatement
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- 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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. The following quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit 4Th Quarter 2023 Reinstatement
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.
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 (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 credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC has a time limit and deadline for claiming. 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 can help your business or organization retain workers, maintain cash flow and recover from a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading, and stay safe.
Employee Retention Credit 4Th Quarter 2023 Reinstatement
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.
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).
Are all ERC applicants eligible?
ERCs are not available to all. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, 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.
- The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter in 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
What is the ERC rate?
The amount ERC received by a business or organization will depend upon several factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. The article above provides a detailed explanation on how ERC is calculated.
How to claim 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).
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?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The last day to submit Form 941 for each quarter is the last calendar month. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can be as late as two years after you paid the tax, but the later date is the preferred date.