COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 Employee Retention Credit? Employee Retention Credit Do It Yourself
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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
Main Features and Benefits
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The credit amount and percentage vary according to the time period in which it is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. 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 Do It Yourself
- The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
- Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. The credit can be requested in advance by employers using Form 7200.
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main 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 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
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 may qualify for ERC regardless of revenue or business 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 impacts the operations of a business or organization
- Order applies to any calendar year in 2020 or 21
These are some examples:
- Stay-at-home orders restricting non-essential business operations
- Curfews are restrictions on the hours that certain businesses can operate
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The extent and severity of the impact of the order on the revenues and expenses of the business
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts consist of:
- 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 Do It Yourself
- Membership dues
- Gross business income
To compare gross receipts between different quarters of the year, employers must use:
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
- The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
- The same sources reported on your federal income tax form for 2019
Recovery Startup Business
Recovery startup businesses are those that:
- You must have started your business after the 15th of February 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
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 available per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amounts and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is primarily affected by:
- How much an employer’s company was affected by the pandemic.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- The amount of money paid by the employer to each employee as well as their health insurance during pandemic
To claim the ERC, the employer must fill out and submit a form 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 verify the forms, and then give the money to your employer. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.
The ERC won’t be around forever. The ERC began in March 2020, and it will end 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 Do It Yourself
You can find more information below on ERC calculation and credit amount.
The ERC was implemented, amended, or terminated by various laws in 2020. The amount of credit depends on the time frame for which it’s 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 and type of employees can affect the definition and calculation for qualified wages and health care costs. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. 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 & Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Do It Yourself
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||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||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)||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 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 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 also allows the employer to claim the ERC for current or future quarters. The employer can use the Form 941 for:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Do It Yourself
- Any excess credit can be carried forward to the next quarter
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- 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 is used to report any advance payment of credit received by the IRS
- Line 24 is the place to ask for an advance payment if you need it.
- Report any credit balance that may be carried forward into the next quarter using Line 25
- 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 online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- If you need clarification or assistance, contact the IRS or an accountant.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use the Form 941 X to: Employee Retention Credit Do It Yourself
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date Form 941, and attach any supporting documentation or schedules
The following are some resources and tips for filling in Form 941X.
- Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Do It Yourself
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- You can also contact a tax expert or the IRS for clarification or additional assistance.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following each quarter. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 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 quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit Do It Yourself
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 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 by June 15, 2020, then the deadline to file Form 941-X will be 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 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. 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.
This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. For clarifications or help, you can always contact an IRS agent or tax professional.
The ERC is a great tool for both your business and employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thanks for reading and please stay safe.
Employee Retention Credit Do It Yourself
What is the ERC?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Does everyone qualify for the ERC program?
ERC isn’t available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
More details are available above. But here are some of the highlights.
- 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.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much is ERC?
The amount of ERC that a company will receive depends on a number of 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. To learn more about how ERCs are calculated, please read the article.
How to claim ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
When is the deadline to file the ERC Forms
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The last day to submit Form 941 for each quarter is the last calendar month. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It can be as late as two years after you paid the tax, but the later date is the preferred date.