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.
To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 Database
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, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. 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 Advantages
- Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit Database
- 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.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- 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.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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 may qualify for ERC regardless of revenue or business suspension.
An order of the government can suspend a business or an organization in full or part if it:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a 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-athome orders restrict non-essential enterprises from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Capacity limits that reduce the number of customers or clients that can be served by a business
- 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 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 magnitude and impact of the order upon the revenue and expenses of a business
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- 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 revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts include the following:
- Sales of goods & services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions, gifts and grants Employee Retention Credit Database
- Dues and fees for membership
- Gross profits from trades and businesses
To compare gross revenues for different quarters an employer can use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
A recovery startup is a business:
- Begun carrying on any business after February 15th, 2020
- Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is determined
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit per quarter will be $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is primarily affected by:
- 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
- What the employer paid each employee for their health insurance and during the pandemic
To claim the ERC, the employer must fill out and submit a form to the IRS. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will then check the forms before giving the money to employers. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
ERCs are not available forever. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. Employers must also use the money well and not waste it. Employee Retention Credit Database
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. 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 of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. The size of an employer depends on its number of FTEs and the time period. The table below summarizes the rules and thresholds for determining employer size in each time period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages and Health Insurance Costs
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit Database
|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 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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 allows the employer to do:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit Database
- Carry forward any excess credit to subsequent quarters
The employer should:
- Use the latest version 941 which reflects updates and changes in the ERC.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 to request an advance payment of the credit if needed
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
Some tips and resources for filling out Form 941 are:
- Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
- The IRS website has updated FAQs on the ERC and Form 941.
- If you need clarification or assistance, contact the IRS or an accountant.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. The Form 941X allows the employer retroactively to claim ERC for previous quarters. Form 941-X can be used by the employer to: Employee Retention Credit Database
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- 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 why Form 941 is being corrected or adjusted
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Line 25 should be used to declare any additional amount claimed as a credit each quarter
- Use Line 26 to report any credit or refund due to the ERC claim.
- Attach any supporting documents and schedules to Form 941-X.
Here are some tips and resources to help you fill out Form 941X:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Database
- After making a correction or finding an error, you should file Form 941X.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- 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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. 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. After the end of the quarterly period. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Database
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.
Employee Retention Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.
The ERC, 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 has a time limit and deadline for claiming. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERC can have a significant impact on your business, organization, and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope this article has helped you understand more about the ERC and how to claim it. We thank you for reading. Please stay safe.
Employee Retention Credit Database
What is an ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).
Is everyone eligible for the ERC?
Not everyone is eligible for the ERC. 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.
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 receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
What is the ERC worth?
The amount that an organization or company receives in ERC will depend on many factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. If you want a more detailed explanation, read the above article.
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).
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 file the ERC Forms
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
For Form 941 is generally the last day of the month following the end of each quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.