COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over 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 first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.
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 Basis
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 created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features and Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and the limit vary depending on the time period for which 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 will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Employee Retention Credit Basis
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- 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. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also 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. The credit can be requested in advance by employers using Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:
- The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
- 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 government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order has a direct impact on the operations of an organization or business
- This order is applicable to any calendar quarter of 2020 or 2021
Here are some examples of government orders that can result in a business being suspended:
- Orders to stay at home that prevent non-essential companies from operating
- Curfews are restrictions on the hours that certain businesses can operate
- Limits in capacity that restrict the number or clients that a business can serve
- Travel bans or restrictions that affect the ability of a business to transport goods or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The scope and nature of the order as well as how it impacts the business.
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The extent and severity of the impact of the order on the revenues and expenses of the business
A significant decline in gross revenues is experienced by a business or organization if:
- The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 2019.
- The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.
Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts are:
- Sales of goods & services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Donations, contributions, grants and gifts Employee Retention Credit Basis
- Dues and fees for membership
- Gross profit from business or trade
To compare gross revenues for different quarters an employer can use:
- It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns for 2019.
- 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
The recovery startup business is one that:
- You must have started your business after the 15th of February 2020
- 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 startups are not exempt from certain rules and restrictions.
- The maximum credit available 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
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
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:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
Employers must complete and send IRS forms to claim 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 then check the forms before giving the money to employers. 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 will expire in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Basis
The following information provides more details on the ERC credit and how it is calculated.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. Credit amounts vary depending on when they are claimed. The table below summarises key features and differences for the ERC in each time frame:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number 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 following table summarizes rules and thresholds to determine employer size.
|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. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Basis
|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 the Credit and Report It
To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use the Form 941 for:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit Basis
- Any excess credit can be carried forward to the next quarter
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d when reporting the credit for each quarter.
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 to request a credit advance if necessary
- 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.
Tips and resources on how to complete Form 941 include:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- Contact the IRS or a tax professional for assistance or clarification if needed
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X allows employers to claim ERC retroactively. The employer may use Form 941 to: Employee Retention Credit Basis
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- 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
You can find some helpful tips on how to fill out the Form 941-X here:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Credit Basis
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- You can also contact a tax expert or the IRS for clarification or additional assistance.
Deadline and Statute of Limitations
The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. 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. Following the end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Basis
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. 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.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
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. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. For clarifications or help, you can always contact an IRS agent or tax professional.
The ERC can make a big difference for your business or organization and your 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. Stay safe and thank you for reading.
Employee Retention Credit Basis
What is an ERC?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
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).
Who is eligible for the ERC?
ERC eligibility is not universal. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
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 revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period 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.
How much is the ERC?
The amount of ERC a company or organization receives will depend on 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. The article above provides a detailed explanation on how ERC is calculated.
How to claim the 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 report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
When is the deadline to submit the ERC form?
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
Form 941 deadline is typically the last of the month following each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. This can also be up to two years, based on the date when the tax is paid.