COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.
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 Irma
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees affected by COVID-19. The ERC has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features and Benefits
- Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. 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 Irma
- 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 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. 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 gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses qualify for ERC despite business suspensions or revenue decreases.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order will affect the operation of the business or the organization
- Order applies to any calendar year in 2020 or 21
Here are some examples of government orders that can result in a business being suspended:
- 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 bans and restrictions that restrict the ability for a company to transport services or goods
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- How the nature and scope and the order affect the operation of the business
- The order’s duration, frequency, and alignment with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
It is considered a significant decrease in gross revenue if a business has:
- 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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts are:
- Sales of goods and services
- Interest, dividends, rents, royalties, and annuities
- Gifts, donations, and contributions Employee Retention Credit Irma
- Membership fees and dues
- Gross income from trades or businesses
To calculate and compare gross revenue for different quarters using the following:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
Recovery startup businesses are those that:
- You must have started your business after the 15th of February 2020
- If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery startups are not exempt from certain rules and restrictions.
- The maximum credit available per quarter is $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amounts Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC’s main influences are:
- How much an employer’s company was affected 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
- The amount of money paid by the employer to each employee as well as their health insurance during pandemic
The employer has to fill out some forms and send them to the IRS to claim the ERC. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will review the forms and pay the money back to the employer. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.
ERCs are not available forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer has to spend the money efficiently and not waste. Employee Retention Credit Irma
Below you will find detailed information on ERC, including the amount of credit and the calculation.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The amount of the credit varies according to the time period that it is applied for. The following table summarizes the key features and differences of the ERC 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 employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. 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 table below summarizes the rules and thresholds for determining employer size in each time period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages & 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. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of 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. The table below summarizes rules and examples in different scenarios. Employee Retention Credit Irma
|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 Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). 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 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use Form 941 to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Irma
- Carry forward any excess credits to future quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect 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
- Line 13f should be used to report any advance payments made 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 and date Form 941, and include any supporting documents and schedules.
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
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- For clarifications or help, you can contact the IRS.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. Employers can use Form 941/X for Employee Retention Credit Irma
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
The employer should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Line 25 should be used to declare any additional amount claimed as a credit each quarter
- Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
- Sign and date the Form 941 X and add any supporting documents or schedules.
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 Irma
- Fill out Form 941-X immediately after you find an error in Form 941
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
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 for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. The following quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit Irma
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.
Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.
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 does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC can make a big difference for your business or organization and your employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thank you for reading. Stay safe.
Employee Retention Credit Irma
What is an ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).
Does everyone qualify for the ERC program?
Not everyone is eligible for the ERC. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
More details are available above. But here are some of the highlights.
- A government order has suspended the business or organization (wholly or partially) 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.
- 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.
What is the ERC rate?
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. The article above provides a detailed explanation on how ERC is calculated.
How to claim 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.
When is the deadline to file the ERC Forms
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The deadline for Form 941 is usually the last day in the month after the end of every quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. This can also be up to two years, based on the date when the tax is paid.