Employee Retention Credit Flyer

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.

For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is the Employee Retention Credit? Employee Retention Credit Flyer

Employee Retention Tax Credit (ERC), is a refundable tax credit for organizations and businesses with employees who have been 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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.

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 percentage and the limit vary depending on the time period for which the credit is 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. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit Flyer
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 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 also request an advance payment of the credit by filing Form 7200.

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Eligibility Criteria

In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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
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.

Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order restricts commerce, travel or group meetings because of COVID-19
The order affects the operations of the business or organization
This order is applicable to any calendar quarter of 2020 or 2021

Here are some examples of government orders that can result in a business being suspended:

Stay-at-home orders that restrict non-essential businesses from operating
Curfews are restrictions on the hours that certain businesses can operate
Limits to the number of clients or customers that a company can serve
Travel restrictions or bans that impact the ability of an organization to transport goods and services

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

The scope and nature of the order as well as how it impacts the business.
The length and frequency of your order and the way it corresponds to the calendar quarters
The impact and magnitude of the order to the business’s revenues and costs

Revenue Drop

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 of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 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 & services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Gifts, donations, and contributions Employee Retention Credit Flyer
Membership fees and dues
Gross profits from trades and businesses

Employers must use the following formulas to calculate gross receipts and compare them between quarters.

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns for 2019.
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 startup that is in recovery can be defined as

You must have started your business after the 15th of February 2020
The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million

If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. There are certain limitations and rules that apply to recovery startups businesses.

The maximum credit per quarter will be $50,000
Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts Calculation

There are different ERC rules and amounts for different employers and periods of time. The ERC is primarily affected by:

How much business income dropped compared to 2019.
The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
How much the employer paid to each employee and their health insurance during the pandemic

The employer has to fill out some forms and send them to the IRS to claim the ERC. 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 money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.

The ERC will no longer be available. It started in March 2020 and will end in September 2022. Employers must claim their ERC before they expire or become unavailable. Employers must also use the money well and not waste it. Employee Retention Credit Flyer

Below you will find detailed information on ERC, including the amount of credit and the calculation.

Time Period

The ERC was implemented, amended, or terminated by various laws in 2020. The amount of the credit varies according to the time period that it is applied for. 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The following table summarizes rules and thresholds to determine employer size.

Time Period	Small Employer Threshold	Large Employer Threshold
2020	Less than or equal to 100 FTEs in 2019	More than 100 FTEs in 2019
Q1-Q2 2021	Less than or equal to 500 FTEs in 2019	More than 500 FTEs in 2019
Q3-Q4 2021	Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.	More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.

To count FTEs for a given year or quarter, an employer must use the following steps:

Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
Divide the total hours by120and round down to the nearest whole number
Add the number of FTEs from Step One and Step Three for each month in the year or quarter
Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)

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. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. 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 Flyer

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 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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

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 is used by employers to:

ERC – Reduce the amount the employer is required to pay in taxes.
Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention Credit Flyer
You can carry forward any credit balance to subsequent quarters

To fill out Form 941 correctly and avoid common errors, the employer should:

Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
Use Line 13d to report the amount of credit claimed for each quarter
Line 13f should be used to report any advance payments made by the IRS.
Use Line 24 to request a credit advance if necessary
You can report excess credit on Line 25 for the following quarters.
Sign Form 941, date it and attach any documents or schedules that you wish to include.

The following are some resources and tips for filling in Form 941.

Use electronic filing services (efile) and online services to submit the Form 941 faster, 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.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. 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 Flyer

Claim your refund or credit due to overpaid taxes by claiming the ERC
Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

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

Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
Use Part 3 of Form 941 to explain why it is being amended or corrected
Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
Use Line 25 to claim any additional credit for each quarter.
You can use Line 26 to request a refund or credit due to claiming 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:

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit Flyer
You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
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, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. The following quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Flyer

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.

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Conclusion

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, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. 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.

Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. 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 that this article helped you to understand more about ERC and the claim process. Thank you for reading, and stay safe.

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Employee Retention Credit Flyer

What is an 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.

Are all ERC applicants eligible?

ERC isn’t available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

You can read more about the criteria here. Here are some highlights.

A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.

How much is the ERC?

The amount of ERC a company or organization receives will depend on several factors.

Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. The article above provides a detailed explanation on how ERC is calculated.

How to claim your 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.

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 for Filing the ERC Forms?

The deadlines for filing Forms 941 and 941-X are different.

For Form 941 is generally the last day of the month following the end of each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.