The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. This article will describe what the ERC does, how it operates, and explain how to claim it.
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 For 2023
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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features and Benefits
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The credit amount and percentage vary according to the time period in which it is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. 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 For 2023
- 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.
- 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 may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. The credit can be requested in advance by employers using Form 7200.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
- The employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A business or organization is considered fully or partially suspended by a government order if:
- The order limits commerce, travel, or group meetings due to 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 orders from the government that could cause a business to be suspended are:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- 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 travel bans that limit the ability of businesses to transport products or 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 order’s nature, scope, and impact on the business
- The order’s duration, frequency, and alignment with the calendar quarters
- The order’s impact on revenues and expenses
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 revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.
Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts are:
- Sales of goods and Services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions are gifts, donations and grants Employee Retention Credit For 2023
- Membership fees and dues
- Gross profits from trades and businesses
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
The recovery startup business is one that:
- Start any new business or occupation after February 15, 2019,
- If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit per quarter will be $50,000
- The credit is only applicable to wages paid for the third and fourth quarters of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amounts and Calculation
ERC amounts and rules vary for different time periods and employers. The main factors that affect the ERC are:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much did the employer pay each employee in health insurance?
In order to receive the ERC from the IRS, the employer will need to complete some forms. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will review the forms and pay the money back to the employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
ERCs are not available forever. It started in March 2020 and will end in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. Employers must also use the money well and not waste it. Employee Retention Credit For 2023
Below you will find detailed information on ERC, including the amount of credit and the calculation.
Different laws introduced, amended and terminated the ERC 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 eligible employees will affect the calculation and definition of health insurance and qualified wages. 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. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other 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 of qualified wages, health insurance costs and employer size depends on the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit For 2023
|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 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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows the employer also to claim ERCs in current or future quarters. Form 941 allows the employer to do:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit For 2023
- You can carry forward any credit balance to subsequent quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use line 11c to report qualified wages paid and health insurance premiums 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 if you require an advance credit payment.
- You can report excess credit on Line 25 for the following quarters.
- Sign and date Form 941 and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 include:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Check the IRS website for updates, FAQs, and guidance on Form 941 and 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. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use Form 941-X to: Employee Retention Credit For 2023
- Claim refunds or credits for taxes overpaid due to 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.
The employer should:
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
- Attach any supporting documents and schedules to Form 941-X.
Here are some tips and resources to help you fill out Form 941X:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit For 2023
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- For clarifications or help, you can contact the IRS.
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by 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 For 2023
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, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. 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 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.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
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.
This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC can make a big difference for your business or organization and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article aims to provide you with more information about the ERC. Thank you for reading. Stay safe.
Employee Retention Credit For 2023
What is an ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
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. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
The criteria for eligibility is also listed above. For the highlights, please see:
- 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.
- These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.
How much is ERC?
The amount of ERC that a company will receive depends on a number of factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. The article above provides a detailed explanation on how ERC is calculated.
How to claim ERC?
To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.
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 deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The last day to submit Form 941 for each quarter is the last calendar month. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It is also possible to choose a date of two years following the date on which the tax was paid.