COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. 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 Government Orders Test
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.
Main Features and 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 percentage and limit will vary depending on when the credit is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire 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 Government Orders Test
- The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
- 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. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. By submitting Form 7020, employers can request an early payment of their credit.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main 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 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
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 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
- Order applies to any calendar year in 2020 or 21
Some examples of government orders that can cause a business suspension are:
- Stay-athome orders restrict non-essential enterprises from operating
- Curfews that limit the hours of operation for certain businesses
- Limits to the number of clients or customers that a company can serve
- Bans on travel or restrictions on the ability to transport goods or service by a business
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The impact of an order on revenue and expenses
It is considered a significant decrease in gross revenue if a business has:
- The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period 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 the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts include the following:
- Sales of Goods and Services
- Interest, dividends rents royalties and annuities
- Contributions are gifts, donations and grants Employee Retention Credit Government Orders Test
- Membership dues
- Gross profit from business or trade
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- 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
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
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery startup businesses are subject to certain restrictions and special rules.
- 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
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amounts Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC’s main influences are:
- How much of the employer’s income was affected in 2019 by the pandemic.
- 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
In order to receive the ERC from the IRS, the employer will need to complete some forms. 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 check the forms and give the money to the employer. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.
The ERC won’t be around forever. It began in March 2019 and will finish in September 2020. 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 Government Orders Test
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of credit depends on the time frame for which it’s 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. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. 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 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 earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.
The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The table below summarizes rules and examples in different scenarios. Employee Retention Credit Government Orders Test
|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 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. The employer can use Form 941 to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Government Orders Test
- Carry forward any excess credits to future quarters
The employer should:
- Use the latest version 941 which reflects updates and changes in the ERC.
- 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
- Use Line 13f to declare any advance payments received from the IRS.
- Line 24 is the place to ask for an advance payment if you need it.
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign Form 941, date it and attach any documents or schedules that you wish to include.
Here are some tips and resources to help you fill out Form 941:
- 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. Form 941-X can be used by the employer to: Employee Retention Credit Government Orders Test
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- 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 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
Here are some tips and resources to help you fill out Form 941X:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Government Orders Test
- Fill out Form 941-X immediately after you find an error in Form 941
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- Contact the IRS or a tax professional for assistance or clarification if needed
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. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. Following the end of the quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit Government Orders Test
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 Q1 2020 (January – March), for example, Form 941 is due on 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 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.
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, 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. The ERC may be claimed through IRS Forms 941 and 941X, which require the employer to report the qualified wages paid and the health insurance expenses incurred by each employee.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. 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. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs can be a huge help to your organization or business and its employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading. Stay safe.
Employee Retention Credit Government Orders Test
What is ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Is everyone eligible for the 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.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter in 2019.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much does the ERC cost?
The amount that an organization or company receives in ERC will depend on many factors.
Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. You can read the article above for a more detailed explanation of how ERC is calculated.
How to claim your ERC?
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.
When is the deadline to submit the ERC form?
The deadlines for filing ERC forms for Forms 941 and form 941 X are different.
For Form 941 is generally the last day of the month following the end of each quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.