COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. 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 is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. 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 Lawsuit
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. The ERC was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
The Main Features and Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and limit will vary depending on when the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit Lawsuit
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- 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. The credit can be requested in advance by employers using Form 7200.
Criteria for Eligibility
To qualify for Employee Retention credit (ERC), employers must meet either of 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
- Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period in 2019.
In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $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 will either fully or partially suspend an organization or business if:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order affects the operations of the business or organization
- The order applies to all calendar quarters in 2020 and 2021
Examples of government orders which can lead to a suspension of business include:
- Orders to stay at home that prevent non-essential companies from operating
- Businesses are restricted in their operating hours by curfews
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel bans or restrictions that affect the ability of a business to transport goods or services
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:
- The order’s nature, scope, and impact on the business
- The order’s duration, frequency, and alignment with the calendar quarters
- The order’s impact on revenues and expenses
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
- The gross 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 can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts include the following:
- Sales of Goods & Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions, gifts and grants Employee Retention Credit Lawsuit
- Membership dues
- Gross profit from business or trade
To compare gross receipts between different quarters of the year, employers must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A recovery startup is a business:
- After February 15, 2020, you can start any business or trade.
- 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 startup businesses are subject to certain restrictions and special rules.
- Maximum credit per quarter: $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The main factors that affect the ERC 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
The employer has to fill out some forms and send them to the IRS to claim the ERC. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will check the forms and give the money to the employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.
The ERC will no longer be available. It began in March 2019 and will finish in September 2020. The employer must claim ERC before the expiration date or when it becomes unavailable. Employers must also use the money well and not waste it. Employee Retention Credit Lawsuit
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount depends on the period for which you claim it. 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|
The Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. 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. This table summarizes thresholds and rules to determine the size of an employer for each period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
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 wages include health insurance costs for eligible employees such as co-pays and deductibles.
The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit Lawsuit
|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
For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). The employer has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
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 allows employers to claim ERCs for current or future quarterly periods. Form 941 can be used by the employer to:
- ERC reduces taxes that employers have to deposit at the IRS.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Lawsuit
- Carry forward any excess credit to subsequent quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- 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.
- Report the amount of credit claimed each quarter using Line 13d.
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 if you require an advance credit payment.
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
Here are some tips and resources to help you fill out Form 941:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- The IRS website has updated FAQs on the ERC and Form 941.
- Need clarification? Contact an IRS agent or tax professional.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The employer can also claim the ERC retroactively by using Form 941X. Employers can use Form 941/X for Employee Retention Credit Lawsuit
- 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.
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
To avoid making common errors and fill out the Form 941-X correctly, employers 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 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
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Attach any supporting documents and schedules to Form 941-X.
Here are some tips and resources to help you fill out Form 941X:
- Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Lawsuit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- Need clarification? Contact an IRS agent or tax professional.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following 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. After the end of the quarterly period. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Lawsuit
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 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.
Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.
The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance 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.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. 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 your business or organization retain workers, maintain cash flow and recover from a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Stay safe and thank you for reading.
Employee Retention Credit Lawsuit
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.
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.
Does everyone qualify for the ERC program?
ERC eligibility is not universal. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- 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 is ERC?
The amount that an organization or company receives in ERC will depend on many 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. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim the 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 are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
When is the deadline to file the ERC Forms
The deadlines for filing ERC forms for Forms 941 and form 941 X 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.