COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some 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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 the Employee Retention Credit? Employee Retention Credit Essential Business
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 is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 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 the maximum credit vary depending on how long the credit can be claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Employee Retention Credit Essential Business
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- 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. Employers can request an advance payment by submitting Form 7200.
Criteria for Eligibility
Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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 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
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 qualify for ERC despite business suspensions or revenue decreases.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order affects the operations of the business or 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 restricting non-essential business operations
- Certain businesses are subject to curfews which limit their hours of operation
- Limits in capacity that restrict the number or clients that a business can serve
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The scope and nature of the order as well as how it impacts the 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
It is considered a significant decrease in gross revenue if a business has:
- 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 from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 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 consist of:
- Sales of goods and services
- Dividends (rents), royalties and interest
- Contributions, gifts, grants, and donations Employee Retention Credit Essential Business
- Membership dues
- Gross revenue from businesses or trades
To calculate and compare gross revenue for different quarters using the following:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
A recovery startup business is a business that:
- After February 15, 2020, you can start any business or trade.
- 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. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum credit amount per quarter is $50,000
- The credit is only applicable to wages paid for the third and fourth quarters of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is primarily affected by:
- How much an employer’s company was affected by the pandemic.
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- What the employer paid each employee for their health insurance and during the pandemic
To receive the ERC, employers must submit forms to the IRS. The forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will verify the forms, and then give the money to your employer. 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 will expire in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer should also make sure to not waste the money. Employee Retention Credit Essential Business
Here is more information about the ERC and its calculation.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount varies depending on the time period for which it is claimed. 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 and type of employees can affect the definition and calculation for qualified wages and health care 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 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 refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Essential Business
|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 the 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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 can be used by the employer to:
- 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 Essential Business
- 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
- Follow the instructions and worksheets provided by the IRS for calculating and reporting 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.
- Use Line 13f to report any advance payments of the credit received from the IRS
- Use Line 24 to request a credit advance if necessary
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign the form 941, and attach any supporting documents.
Some tips and resources for filling out Form 941 are:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- For clarifications or help, you can contact the IRS.
The Form 941 X is used for corrections and adjustments to a Form 941. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use Form 941-X to: Employee Retention Credit Essential Business
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- The IRS has provided worksheets to help you calculate the ERC.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain your corrections or adjustments on Form 941.
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Line 25 is the place to enter any additional credit claims for each quarter.
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Sign and date the Form 941 X and add any supporting documents or schedules.
You can find some helpful tips on how to fill out the Form 941-X here:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit Essential Business
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- If you need clarification or assistance, contact the IRS or an accountant.
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, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. 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. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit Essential Business
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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
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 (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 is not available forever and has a deadline and a statute of limitations for claiming it. 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.
ERCs are a powerful tool that can help your company or organization, as well as your employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. We thank you for reading. Please stay safe.
Employee Retention Credit Essential Business
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 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.
Can everyone apply for ERC?
Not everyone is eligible for the ERC. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
Below are some details about eligibility.
- 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.
- 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 the ERC?
The amount of ERC an organization or business receives depends on several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. The article above provides a detailed explanation on how ERC is calculated.
How do I claim my 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.
The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
When is the deadline to submit the ERC form?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
For Form 941 is generally the last day of the month following the end of each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It can be as late as two years after you paid the tax, but the later date is the preferred date.