Employee Retention Credit California Tax Treatment

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. 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.

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 is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. This article will 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 the Employee Retention Credit? Employee Retention Credit California Tax Treatment

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 was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

The Main Features and Benefits

Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
The credit limit and percentage are dependent on the period of time for which you claim the credit. 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. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Employee Retention Credit California Tax Treatment
The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
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. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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.

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.

Business Suspension

A government order may suspend a business, or even partially suspend it.

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order impacts the operations of a business or organization
Order applies to any calendar year in 2020 or 21

Some examples of orders from the government that could cause a business to be suspended are:

Orders to stay at home that prevent non-essential companies from operating
Businesses are restricted in their operating hours by curfews
Limits in capacity that restrict the number or clients that a business can serve
Travel restrictions or travel bans that limit the ability of businesses to transport products or services

To determine if the business was partially or fully suspended by an official order, employers must consider:

The order’s nature, scope, and impact on the business
The duration, frequency of the orders and their alignment with the four quarters calendar.
The impact of an order on revenue and expenses

Revenue Decline

It is considered a significant decrease in gross revenue if a business has:

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

Sales of goods & services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Contributions, gifts and grants Employee Retention Credit California Tax Treatment
Membership dues
Gross profit from business or trade

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
For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
The same sources of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A recovery startup is a business:

Begun carrying on any business after February 15th, 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

If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery startups are not exempt from certain rules and restrictions.

The maximum amount of credit per quarter is $50,000
The credit is only applicable to wages paid for the third and fourth quarters of 2021
The maximum credit available for startup businesses is $250 million.

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Credit Amount and Calculation

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

How much business income dropped compared to 2019.
What number of employees did the employer have in 2019 and 2020/2021?
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 forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the 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 started in March 2020 and ends in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit California Tax Treatment

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

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The credit amount varies depending on the time period for which it is claimed. The following table summarises the main features and differences between the ERCs of each time period:

Time Period	Law	Eligible Employers	Credit Rate	Qualified Wages
2020	CARES Act	Employers with business suspension or revenue decline of more than 50%	50% of qualified wages up to $10,000 per employee per year	Wages paid from March 13 to December 31, 2020
Q1-Q3 2021	CAA and ARPA	Employers with business suspension or revenue decline of more than 20%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from January 1 to September 30, 2021
Q3-Q4 2021 (Recovery Startup Business)	ARPA	Recovery startup businesses with average annual gross receipts of no more than $1 million,	70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),	Wages paid from July 1 to December 31, 2021,
Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	ARPA and IIJA	Employers with a revenue decline of more than 90%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from October 1, 2021, to September 30, 2022

Number of Employees

The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. The size of an employer depends on its number of FTEs and the time period. The table below summarizes all the rules and thresholds that determine an employer’s 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 are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.

The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table provides a summary of the rules for different scenarios. Employee Retention Credit California Tax Treatment

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 the Credit and Report It

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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use the Form 941 for:

ERC – Reduce the amount the employer is required to pay in taxes.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit California Tax Treatment
You can carry forward any credit balance to subsequent quarters

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

Use the latest Form 941, 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 Line 1c to report on the health insurance and wages that eligible employees have received.
Use Line 13d to declare the credit amount 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
You can report excess credit on Line 25 for the following quarters.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

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
Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use the Form 941 X to: Employee Retention Credit California Tax Treatment

Claim refunds or credits for taxes overpaid due to the ERC
Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

Employers can avoid common mistakes by filling in Form 941X correctly.

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 for indicating which lines of the Form 941 need to be corrected or adjusted
Use Part 3 to explain why Form 941 is being corrected or adjusted
Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
Line 25 should be used to declare any additional amount claimed as a credit each quarter
You can use Line 26 to request a refund or credit due to claiming ERC.
Sign and date Form 941, and attach any supporting documentation or schedules

Tips and resources on how to complete Form 941 X include:

You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit California Tax Treatment
Fill out Form 941-X immediately after you find an error in Form 941
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
You can also contact a tax expert or the IRS for clarification or additional assistance.

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example, Q1 2020 (January-March) Form 941 will be due on 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. 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 California Tax Treatment

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, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.

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Conclusion

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 can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. 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.

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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. 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. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thanks for reading and please stay safe.

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Employee Retention Credit California Tax Treatment

What is ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.

The CARES Act created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.

Who is eligible for the ERC?

ERC isn’t available to everyone. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.

The criteria for eligibility is also listed above. For the highlights, please see:

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.

How much is the ERC?

The amount of ERC an organization or business receives depends 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. For a detailed explanation of ERC, you can read the article mentioned above.

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).

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 for filing Forms 941 and 941-X are different.

Form 941 deadline is typically the last of the month following each quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.