COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation 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 Deduction Disallowance
The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features & Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The credit amount and percentage vary according to the time period in which it is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. 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 Deduction Disallowance
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to 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 can request an advance payment by submitting Form 7200.
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 2020 or 2021
- Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses can be eligible for ERC regardless of their revenue decline or suspension.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits commerce, travel, or group meetings due to COVID-19
- The order will affect the operation of the business or the organization
- The order will apply to any calendar month in 2020 or even 2021
Some examples of government orders that can cause a business suspension are:
- Stay-athome orders restrict non-essential enterprises from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Limits on the capacity of a business that limit how many customers or clients it 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 nature and scope of the order and how it affects the operations of the business
- The order’s duration, frequency, and alignment with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
A significant decline in gross revenues is experienced by a business or organization 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 for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 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 can include:
- Sales of goods and Services
- Interest, dividends, rents, royalties, and annuities
- Contributions, gifts and grants Employee Retention Credit Deduction Disallowance
- Membership fees and dues
- Gross business income
To calculate and compare gross receipts for different quarters, an employer must use:
- It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 business is a business that:
- Began carrying on any trade or business after February 15, 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
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. 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 will only be available to employees who have paid wages in the third quarter and fourth of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is affected primarily by:
- How much an employer’s company was affected by the pandemic.
- What number of employees did the employer have in 2019 and 2020/2021?
- What the employer paid each employee for their health insurance and during the pandemic
To receive the ERC, employers must submit forms to the IRS. 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 may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.
ERCs are not available forever. The ERC started in March 2020 and ends 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 Deduction Disallowance
Here is more information about the ERC and its calculation.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. 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|
The Number of Employees
The number affects the calculation of qualified wages for employees and their health insurance 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 & Health Insurance Costs
Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit Deduction Disallowance
|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 and Report Credit
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 is required to report the qualified wages, health insurance costs and credit claimed by 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. Form 941 allows the employer also to claim ERCs in current or future quarters. The employer can use the Form 941 for:
- ERC reduces taxes that employers have to deposit at the IRS.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit Deduction Disallowance
- Carry over any excess credit into the following quarter
The employer should:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d for the credit claim amount per quarter
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 to request a credit advance if necessary
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign and date Form 941 and attach any supporting documents or schedules
The following are some resources and tips for filling in Form 941.
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- 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. Employers can use Form 941/X for Employee Retention Credit Deduction Disallowance
- 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.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Line 25 is the place to enter any additional credit claims for each quarter.
- Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
- Sign and date the Form 941 X and add any supporting documents or schedules.
Here are some tips and resources to help you fill out Form 941X:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Deduction Disallowance
- After making a correction or finding an error, you should file Form 941X.
- 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 submitting Form 941 generally falls on the last calendar day of the following month. 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. After the end quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit Deduction Disallowance
The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is 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 (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC is a great tool for both your business and employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thank you for reading. Stay safe.
Employee Retention Credit Deduction Disallowance
What is ERC?
Employee Retention Credit: This is a credit that employers can claim if they retained employees 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.
Are all ERC applicants eligible?
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.
You can read more about the criteria here. Here are some highlights.
- A government order imposed a suspension (full or partial) on the business or organization 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.
- These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.
How much is ERC?
The amount of ERC a company or organization receives will depend on several 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?
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
When is the Deadline for Filing the ERC Forms?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
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. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.