COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
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 has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.
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 (ERC)? Employee Retention Credit Español
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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features & Benefits
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, it is 70%. The limit is $7,000 per quarter per 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 Español
- 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 may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main 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 gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar 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.
An order of the government can suspend a business or an organization in full or part if it:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order has a direct impact on the operations of an organization or business
- The order will apply to any calendar month in 2020 or even 2021
These are some examples:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- 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 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 order’s duration, frequency, and alignment with the calendar quarters
- The impact and magnitude of the order to the business’s revenues and costs
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 2019.
- The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.
Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts consist of:
- Sales of goods and Services
- Interest, dividends, rents, royalties, and annuities
- Contributions are gifts, donations and grants Employee Retention Credit Español
- Membership fees and dues
- Gross revenue from businesses or trades
To calculate and compare gross revenue for different quarters using the following:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return 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 of income that it reported on its federal income tax return for 2019
Recovery Startup Business
A recovery startup is a business:
- After February 15, 2020, you can start any business or trade.
- 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
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startup businesses are subject to certain restrictions and special rules.
- Maximum credit per quarter: $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The main factors that affect the ERC are:
- How much an employer’s company was affected by the pandemic.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much the employer paid to each employee and their health insurance during the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will check the forms and give the money 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 is not available forever. The ERC will expire in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer has to spend the money efficiently and not waste. Employee Retention Credit Español
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount depends on the period for which you claim it. The following table summarizes and compares the ERC’s main features for each 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 of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. 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 the thresholds and rules for determining the employer size for 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 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. 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 and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Español
|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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. 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 Español
- Carry forward any excess credit to subsequent quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
- Use Line 13d to declare the credit amount claimed for each quarter
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 if you require an advance credit payment.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941, and include any supporting documents and schedules.
The following are some resources and tips for filling in Form 941.
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- The IRS website has updated FAQs on the ERC and Form 941.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
The Form 941 X is used for corrections and adjustments to a Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer may use Form 941 to: Employee Retention Credit Español
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest version of Form 941-X 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 Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain your corrections or adjustments on Form 941.
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Line 25 should be used to declare any additional amount claimed as a credit 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.
Some tips and resources for filling out Form 941-X are:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Español
- Fill out Form 941-X immediately after you find an error in Form 941
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. The end of the quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit Español
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For example, for Q1 2020 (January-March), Form 941 was due by 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 (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.
The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. You can also contact the IRS or a tax professional for assistance or clarification if needed.
The ERC can make a big difference for your business or organization and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Stay safe and thank you for reading.
Employee Retention Credit Español
What is ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.
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).
Does everyone qualify for the ERC program?
ERC isn’t available to everyone. 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.
More details are available above. But here are some of the highlights.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar 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 the ERC?
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. 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 of Form 941, Form 941X and ERC 941 are different.
Form 941 deadline is typically the last of the month following each quarter. 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.