The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around 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.
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 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 describe what the ERC does, how it operates, and explain how to claim it.
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 Amended Return
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. 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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features & Benefits
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The 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. 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 Amended Return
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.
To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:
- 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 qualify for ERC despite business suspensions or revenue decreases.
A business or organization is considered fully or partially suspended by a government order if:
- The order limits commerce, travel, or group meetings due to COVID-19
- The order has an impact on the business or 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
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
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 order’s duration, frequency, and alignment with the calendar quarters
- The order’s impact on revenues and expenses
A business or organization is considered to have experienced a significant decline in gross receipts if:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
- The gross receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 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 can include:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Donations, contributions, grants and gifts Employee Retention Credit Amended Return
- Dues and fees for membership
- Gross income from trades or businesses
Employers must use the following formulas to calculate gross receipts and compare them between quarters.
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return 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.
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
The recovery startup business is one that:
- After February 15, 2020, you can start any business or trade.
- 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. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum credit per quarter will be $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC is affected by the following main factors:
- How much of the employer’s income was affected in 2019 by the pandemic.
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- How much did the employer pay each employee in health insurance?
The employer has to fill out some forms and send them to the IRS to claim the ERC. 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 examine the forms to determine if the employer is eligible and then pay him the money. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
The ERC will not be available indefinitely. 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 Amended Return
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 amount of the credit varies according to the time period that it is applied for. 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. 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 following table summarizes the thresholds and rules for determining the employer size for 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 refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Amended Return
|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|
Claiming and Reporting 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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. 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 Amended Return
- You can carry forward any credit balance to subsequent quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- 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 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 Form 941, date it and attach any documents or schedules that you wish to include.
The following are some resources and tips for filling in Form 941.
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- For clarifications or help, you can contact the IRS.
The Form 941 X is used for corrections and adjustments to a Form 941. 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 Amended Return
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
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.
- The IRS has provided worksheets to help you calculate the ERC.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Line 25 is the place to enter any additional credit claims for each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date the Form 941 X and add any supporting documents or schedules.
The following are some resources and tips for filling in Form 941X.
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit Amended Return
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit Amended Return
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 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
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, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. 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.
If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC 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.
ERC can have a significant impact on your business, organization, and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thank you for reading, and stay safe.
Employee Retention Credit Amended Return
What is the ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Does everyone qualify for the ERC program?
The ERC is not available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
You can read more about the criteria here. Here are some highlights.
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- 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.
- 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 rate?
The amount ERC received by a business or organization will depend upon several factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. To learn more about how ERCs are calculated, please read the article.
How to claim your ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.
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 the deadline to submit the ERC form?
The deadlines of Form 941, Form 941X and ERC 941 are different.
The last day for Form 941 in most cases is the last month following the end each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.