Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 2023. 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? Employee Retention Credit Form 941 X
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. 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 & Benefits
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Employee Retention Credit Form 941 X
- 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.
To qualify for Employee Retention credit (ERC), employers must meet either of two main 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
- Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.
There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses can qualify for the ERC regardless of business suspension or revenue decline.
A government order may suspend a business, or even partially suspend it.
- The order restricts commerce, travel or group meetings because of COVID-19
- The order impacts the operations of a business or organization
- The order applies to all calendar quarters in 2020 and 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-at-home orders restricting non-essential business operations
- Certain businesses are subject to curfews which limit their hours of operation
- 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
An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.
- The order’s nature, scope, and impact on the business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The extent and severity of the impact of the order on the revenues and expenses of the business
A significant decline in gross revenues is experienced by a business or organization if:
- 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 amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts can include:
- Sales of goods and services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions, gifts, grants, and donations Employee Retention Credit Form 941 X
- Dues and fees for membership
- Gross income from trades or businesses
To compare gross receipts between different quarters of the year, employers must use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
Recovery startup businesses are those that:
- After February 15, 2020, you can start any business or trade.
- Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be determined
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum credit amount per quarter is $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amounts and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is affected by the following main factors:
- 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.
- 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 claim the ERC, the employer must fill out and submit a form to the IRS. 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 money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
ERCs are not available forever. It began in March 2019 and will finish in September 2020. The employer has to claim the ERC before it expires or becomes unavailable. The employer has to spend the money efficiently and not waste. Employee Retention Credit Form 941 X
Here is more information about the ERC and its calculation.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount varies depending on the time period for which it is claimed. The following table summarises the main features and differences between the ERCs of each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number and type of employees can affect the definition and calculation for qualified wages and health care costs. 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. This table summarizes thresholds and rules to determine the size of an employer for each 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)
Qualified Wages and Health Insurance Costs
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 salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The table below summarizes rules and examples in different scenarios. Employee Retention Credit Form 941 X
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||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||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)||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 the Credit and Report It
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 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 also allows the employer to claim the ERC for current or future quarters. Form 941 is used by employers to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention Credit Form 941 X
- You can carry forward any credit balance to subsequent quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the latest version 941 which reflects updates and changes in the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d when reporting the credit 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 and date Form 941, and include any supporting documents and 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
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
Form 941-X is used to correct errors or make adjustments on a previously filed 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 Form 941 X
- Claim your refund or credit due to overpaid taxes by claiming the 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 version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- The IRS has provided worksheets to help you calculate the ERC.
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Attach any supporting documents and schedules to Form 941-X.
Tips and resources on how to complete Form 941 X include:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit Form 941 X
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- 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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. Following the end of the quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Form 941 X
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.
Employee Retention Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.
The ERC is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. 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 will not be available indefinitely, and it has a set deadline and statute of limitations. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can also contact the IRS or a tax professional for assistance or clarification if needed.
ERCs can be a huge help to your organization or business and its 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. We thank you for reading. Please stay safe.
Employee Retention Credit Form 941 X
What is the ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Is everyone eligible for the ERC?
ERC eligibility is not universal. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government-issued order temporarily or permanently suspended the organization or business 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.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
What is the ERC worth?
The amount that an organization or company receives in ERC will depend on many factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim ERC?
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with 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.
When is the deadline to submit the ERC form?
The deadlines for filing Forms 941 and 941-X are different.
The last day for Form 941 in most cases is the last month following the end 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.