Employee Retention Credit Employee Benefits

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.

Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.

The ERC 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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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 Employee Benefits

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

The Main Features and Benefits

The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
The percentage and limit will vary depending on when the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. 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 Employee Benefits
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.
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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can request an advance payment by submitting Form 7200.

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Eligibility Criteria

To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.

The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 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.

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses may qualify for ERC regardless of revenue or business suspension.

Business Suspension

A government order will either fully or partially suspend an organization or business if:

The order limits travel, commerce or group meetings as a result of 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-at-home orders that restrict non-essential businesses from operating
Certain businesses have curfews that limit their hours of operations
Limits on the capacity of a business that limit how many customers or clients it can serve
Travel bans or restrictions that affect the ability of a business to transport goods or services

To determine if a business was fully or partially suspended by a government order, an employer must consider:

The order’s nature, scope, and impact on the business
The duration and frequency of the order and how it coincides with the calendar quarters
The order’s impact on revenues and expenses

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 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
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Donations, contributions, grants and gifts Employee Retention Credit Employee Benefits
Membership fees and dues
Gross profits from trades and businesses

To compare gross revenues for different quarters an employer can use:

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 income that it reported on its federal income tax return for 2019

Recovery Startup Business

The recovery startup business is one that:

Begun carrying on any business after February 15th, 2020
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startup businesses are subject to certain restrictions and special rules.

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
The maximum credit available for startup businesses is $250 million.

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Credit Amounts and Calculation

For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The main factors that affect the ERC are:

How much of the employer’s income was affected in 2019 by the pandemic.
How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
How much did the employer pay each employee in health insurance?

The employer has to fill out some forms and send them to the IRS to claim the ERC. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will review the forms and pay the money back to the 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 will not be available indefinitely. It started in March 2020 and will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Employee Benefits

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

Time Period

Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. Credit amounts vary depending on when they are claimed. The following table summarizes the key features and differences of the ERC for 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. 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)

Earnings and Costs of Health Insurance

Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.

The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Employee Benefits

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim the Credit and Report It

For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. 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

Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 also allows the employer to claim the ERC for current or future quarters. Form 941 can be used by the employer to:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Employee Benefits
Carry forward any excess credits to future quarters

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
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
Report the amount of credit claimed each quarter using Line 13d.
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
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.

You can find some helpful tips on how to fill out Form 941 here:

Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
Contact the IRS or a tax professional for assistance or clarification if needed

Form 941-X

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

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.
Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed

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

Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
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 report any additional amount of credit claimed for each quarter
You can use Line 26 to request a refund or credit due to claiming ERC.
Sign and date Form 941-X and attach any supporting documents 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 Employee Benefits
After making a correction or finding an error, you should file Form 941X.
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

The deadline for filing Form 941 is generally the last day of the month following the end of 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 of the quarterly period. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Employee Benefits

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 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. If an employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.

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Conclusion

Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.

The ERC (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 may be claimed through IRS Forms 941 and 941X, which require the employer to report the qualified wages paid and the health insurance expenses incurred by each employee.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. 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. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article aims to provide you with more information about the ERC. Thank you for reading. Stay safe.

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Employee Retention Credit Employee Benefits

What is ERC and what does it do?

Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.

It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021

Does everyone qualify for the ERC program?

Not everyone is eligible for the ERC. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period 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 ERC?

The amount ERC received by a business or organization will depend upon 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. You can read the article above for a more detailed explanation of how ERC is calculated.

How do I claim my ERC?

To claim the ERC an employer must submit a federal employment reform (Form 941)-X or a revised employment tax return to the IRS.

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.

What is the deadline for submitting the ERC forms?

The deadlines for filing ERC forms for Forms 941 and form 941 X are different.

The deadline for Form 941 is usually the last day in the month after the end of every quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. This can also be up to two years, based on the date when the tax is paid.