COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations 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 the Employee Retention Credit? Employee Retention Credit Health Plan Expenses
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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features and Advantages
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The percentage and limit will vary depending on when the credit is claimed. 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 is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit Health Plan Expenses
- 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.
- 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. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
- 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.
Criteria for Eligibility
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 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
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits commerce, travel, or group meetings due to COVID-19
- The order impacts the operations of a business or organization
- The order applies to any calendar quarter in 2020 or 2021
Here are some examples of government orders that can result in a business being suspended:
- Stay-athome orders restrict non-essential enterprises from operating
- Curfews are restrictions on the hours that certain businesses can operate
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The order’s impact on revenues and expenses
A business or organization is considered to have experienced a significant decline in gross receipts 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 receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 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 are:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Contributions are gifts, donations and grants Employee Retention Credit Health Plan Expenses
- Dues and fees for membership
- Gross profit from business or trade
To compare gross receipts between different quarters of the year, employers 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 reported on your federal income tax form for 2019
Recovery Startup Business
A startup that is in recovery can be defined as
- After February 15, 2020, you can start any business or trade.
- Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum credit available per quarter is $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC is affected primarily by:
- 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.
- What number of employees did the employer have in 2019 and 2020/2021?
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
Employers must complete and send IRS forms to claim 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 check the forms and give the money to the employer. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.
The ERC is not available forever. The ERC will expire in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer also has to use the money wisely and not waste it. Employee Retention Credit Health Plan Expenses
You can find more information below on ERC calculation and credit amount.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The amount of credit depends on the time frame for which it’s claimed. The table below summarizes key differences and features of the ERCs 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. The size of an employer depends on its number of FTEs 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)
Earnings and Costs of Health Insurance
Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. 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 size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Health Plan Expenses
|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|
Claiming and Reporting the Credit
The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 is used by employers to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit Health Plan Expenses
- Any excess credit can be carried forward to the next quarter
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- 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.
- Use Line 24 to request a credit advance if necessary
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
Some tips and resources for filling out Form 941 are:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- The IRS website has updated FAQs on the ERC and Form 941.
- Need clarification? Contact an IRS agent or tax professional.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X allows employers to claim ERC retroactively. Form 941-X can be used by the employer to: Employee Retention Credit Health Plan Expenses
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
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 the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
Some tips and resources for filling out Form 941-X are:
- Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Health Plan Expenses
- Fill out Form 941-X immediately after you find an error in Form 941
- Updates, FAQs, and guidance about Form 941X and ERC can be found on 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 for submitting Form 941 generally falls on the last calendar day of the following month. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. The employer can still file Form 941 if they have deposited their taxes on time. Following the end of the quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Health Plan Expenses
The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. 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.
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 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. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC has a time limit and deadline for claiming. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs are a powerful tool that can help your company or organization, as well as your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope this article has helped you understand more about the ERC and how to claim it. We thank you for reading. Please stay safe.
Employee Retention Credit Health Plan Expenses
What is 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.
Does everyone qualify for the ERC program?
Not everyone is eligible for the ERC. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
The criteria for eligibility is also listed above. For the highlights, please see:
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period 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 of ERC a company or organization receives will depend on several 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. You can read the article above for a more detailed explanation of how ERC is calculated.
How do I claim my 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.
Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
What is the deadline for submitting 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. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It is also possible to choose a date of two years following the date on which the tax was paid.