Employee Retention Credit How To Claim

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, 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 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. 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 How To Claim

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 was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of 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 the maximum credit vary depending on how long the credit can be 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 How To Claim
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 who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. For 2023 only, employers that are classified as recovery startup business can claim the credit.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.

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Eligibility Criteria

To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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
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 may qualify for ERC regardless of revenue or business suspension.

Business Suspension

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

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order has an impact on the business or organization
The order will apply to any calendar month in 2020 or even 2021

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

Stay-at-home orders restricting non-essential business operations
Curfews are restrictions on the hours that certain businesses can operate
Capacity limits that reduce the number of customers or clients that can be served by a business
Travel bans and restrictions that restrict the ability for a company to transport services or goods

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 nature and extent of the order, and its impact on the operation of your business
The duration, frequency of the orders and their alignment with the four quarters calendar.
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 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 can include:

Sales of goods & services
Interest, dividends, rents, royalties, and annuities
Contributions, gifts, grants, and donations Employee Retention Credit How To Claim
Membership fees and dues
Gross income from trades or 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
Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
The same sources reported on your federal income tax form for 2019

Recovery Startup Business

A recovery startup is a business:

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

It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startup businesses are subject to certain restrictions and special rules.

The maximum credit per quarter will be $50,000
The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
The credit is subject to an overall cap of $250 million for all recovery startup businesses

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Credit Amounts Calculation

ERC amounts and rules vary for different time periods and employers. The ERC is affected by the following main factors:

How much of the employer’s income was affected in 2019 by the pandemic.
How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
How much each employee received from their employer and how they were covered by health insurance in the pandemic

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 check the forms and give the money 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. The ERC began in March 2020, and it will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. Employee Retention Credit How To Claim

You can find more information below on ERC calculation and credit amount.

Time Period

Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The amount of the credit varies according to the time period that it is applied for. 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. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. The following table summarizes the thresholds and rules for determining the employer size for 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)

Qualified Wages & Health Insurance Costs

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 earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

The calculation of qualified wages, health insurance costs and employer size depends on the time period. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit How To Claim

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report the Credit

To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer will need to declare the qualified wages paid and the health insurance expenses paid for eligible employees. They must also report the credit claimed.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 also allows the employer to claim the ERC for current or future quarters. The employer can use the Form 941 for:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention Credit How To Claim
Any excess credit can be carried forward to the next quarter

To avoid making common errors and fill out Form 941 correctly, employers should:

Use the latest version 941 which reflects updates and changes in the ERC.
The IRS has provided worksheets to help you calculate the ERC.
Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
Use Line 13d for the credit claim amount per quarter
Line 13f is used to report any advance payment of credit received by the IRS
Use Line 24 to request an advance payment of the credit if needed
Report any credit balance that may be carried forward into the next quarter using Line 25
Sign Form 941, date it and attach any documents or schedules that you wish to include.

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

Use electronic filing (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.

Form 941-X

The Form 941 X is used for corrections and adjustments to a 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 How To Claim

Claim a refund or credit for overpaid taxes due to claiming the ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.

Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
Use Part 3 for explaining why form 941 has been 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
Sign and date Form 941-X and attach any supporting documents or schedules

Some tips and resources for filling out Form 941-X are:

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit How To Claim
After making a correction or finding an error, you should file Form 941X.
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

Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. The employer can still file Form 941 if they have deposited their taxes on time. The following quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit How To Claim

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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.

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Conclusion

Employee Retention (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.

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

Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC has a time limit and deadline for claiming. 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.

ERC can have a significant impact on your business, organization, and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading, and stay safe.

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Employee Retention Credit How To Claim

What is the ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.

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

Who is 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.

Below are some details about eligibility.

A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
Their gross receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 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.

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

How to claim your ERC?

To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.

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.

What is the deadline for submitting the ERC forms?

The deadlines of Form 941, Form 941X and ERC 941 are different.

Form 941 deadline is typically the last of the month following each quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.