Employee Retention. Credit

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some payroll costs.

The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. This article will 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

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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

Main Features and Advantages

Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
The 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 is 70%, and the limit is $7,000 per employee per quarter. 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
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. 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.

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 gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter 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 can be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

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

Here are some examples of government orders that can result in a business being suspended:

Stay-at-home orders restricting non-essential business operations
Curfews are restrictions on the hours that certain businesses can operate
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

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 extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts 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 consist of:

Sales of Goods & Services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Contributions are gifts, donations and grants Employee Retention. Credit
Membership dues
Gross income from trades or businesses

To calculate and compare gross revenue for different quarters using the following:

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
It is the same income sources that were reported on the federal income tax returns for 2019.

Recovery Startup Business

A recovery startup business is a business that:

After February 15, 2020, you can start any business or trade.
Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be 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.

Maximum credit per quarter: $50,000
The credit is only available for wages paid in the third and fourth quarters of 2021
All recovery startup businesses are subject to an aggregate cap of $250,000,000.

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Credit Amount Calculation

There are different ERC rules and amounts for different employers and periods of time. The ERC is affected primarily by:

How much of the employer’s income was affected in 2019 by the pandemic.
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

To claim the ERC, the employer must fill out and submit a form to the IRS. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will then check the forms before giving the money to employers. 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 will expire in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. Employers must also use the money well and not waste it. Employee Retention. Credit

Here is more information about the ERC and its 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 summarizes and compares the ERC’s main features for each 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. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. 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 & Health Insurance Costs

Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. This table summarises the rules and provides examples for various 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 the Credit

For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use the Form 941 for:

ERC reduces taxes that employers have to deposit at the IRS.
Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention. Credit
Carry forward any excess credits to future quarters

The employer should:

Use the latest version 941 which reflects updates and changes in the ERC.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
Use Line 13d to report the amount of credit claimed for each quarter
Use Line 13f to report any advance payments of the credit 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 and date Form 941, and include any supporting documents and schedules.

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.
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 may use Form 941 to: Employee Retention. Credit

Claim refunds or credits for taxes overpaid due to the 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

To fill out Form 941-X correctly and avoid common errors, the employer should:

Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 for explaining why form 941 has been corrected or adjusted
Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
Use Line 25 to claim any additional credit for each quarter.
Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
Sign and date the Form 941 X and add any supporting documents or schedules.

Some tips and resources for filling out Form 941-X are:

File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention. Credit
You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
Contact the IRS or a tax professional for assistance or clarification if needed

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 for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. After the end of the quarterly period. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention. Credit

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 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 employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.

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Conclusion

Employee Retention Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.

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.

Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. 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. You can contact the IRS for help or clarification, or you could consult a tax expert.

The ERC is a great tool for both your business and employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Thank you for reading, and stay safe.

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Employee Retention. Credit

What is ERC?

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

The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.

Does everyone qualify for the ERC program?

The ERC is not available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

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.
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.

What is the ERC worth?

The amount that an organization or company receives in ERC will depend on many 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. For a detailed explanation of ERC, you can read the article mentioned above.

How do I claim my ERC?

For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).

The employer must 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 file the ERC Forms

The deadlines of Form 941, Form 941X and ERC 941 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 is also possible to choose a date of two years following the date on which the tax was paid.