COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
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 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 Change Of Ownership
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
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 maximum credit vary depending on how long the credit can be claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, it is 70%. The limit is $7,000 per quarter per employee. 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 Change Of Ownership
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers may also request an advanced payment of the credit 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 business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
- 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
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses can be eligible for ERC regardless of their revenue decline or suspension.
An order of the government can suspend a business or an organization in full or part if it:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order has a direct impact on the operations of an organization or business
- The order applies to all calendar quarters in 2020 and 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-at-home orders restricting non-essential business operations
- Curfews that limit the hours of operation for certain businesses
- Capacity limits that reduce the number of customers or clients that can be served by a business
- Travel restrictions or bans that impact the ability of an organization to transport goods and 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 and frequency of your order and the way it corresponds to the calendar quarters
- The impact and magnitude of the order to the business’s revenues and costs
A business or organization is considered to have experienced a significant decline in gross receipts if:
- 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 receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 2019.
Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts include the following:
- Sales of Goods & Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions, gifts, grants, and donations Employee Retention Credit Change Of Ownership
- Membership fees and 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
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
A recovery startup is a business:
- 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
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 available per quarter is $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The main factors that affect the ERC are:
- How much business income dropped compared to 2019.
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- How much the employer paid to each employee and their health insurance during the pandemic
Employers must complete and send IRS forms to claim ERC. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will verify the forms, and then give the money to your employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC will no longer be available. 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 has to spend the money efficiently and not waste. Employee Retention Credit Change Of Ownership
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was implemented, amended, or terminated by various laws in 2020. The amount of the credit varies according to the time period that it is applied for. 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 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 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)
Earnings and Costs of Health Insurance
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified 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 summarizes the rules and examples for different scenarios: Employee Retention Credit Change Of Ownership
|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
To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 allows the employer to do:
- 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 Change Of Ownership
- Any excess credit can be carried forward to the next quarter
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f to declare any advance payments received from the IRS.
- If you need to receive an advance payment, use Line 24.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
You can find some helpful tips on how to fill out Form 941 here:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- Need clarification? Contact an IRS agent or tax professional.
Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Employee Retention Credit Change Of Ownership
- 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.
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
The employer should:
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Use Line 25 to claim any additional credit 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.
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Credit Change Of Ownership
- 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.
- Need clarification? Contact an IRS agent or tax professional.
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. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. Following the end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit Change Of Ownership
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is 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.
Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.
The ERC is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs 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.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. 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. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC can make a big difference for your business or organization and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Stay safe and thank you for reading.
Employee Retention Credit Change Of Ownership
What is ERC and what does it do?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
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. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
Below are some details about eligibility.
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- 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.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
How much is the ERC?
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. If you want a more detailed explanation, read the above article.
How to claim ERC?
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
What is the deadline for submitting 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. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.