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.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation 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 Lookback Period
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 created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 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
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, it is 70%. The limit is $7,000 per quarter per 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 Lookback Period
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- 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.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
- 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.
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 can qualify for the ERC regardless of business suspension or revenue decline.
A government order may suspend a business, or even partially suspend it.
- The order restricts commerce, travel or group meetings because of COVID-19
- The order affects the operations of the business or 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
- Curfews are restrictions on the hours that certain businesses can operate
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel bans or restrictions that affect the ability of a business to transport goods or services
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The impact of an order on revenue and expenses
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 2019.
- The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.
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
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions, gifts and grants Employee Retention Credit Lookback Period
- Membership dues
- Gross profits from trades and 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
- 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 of income that it reported on its federal income tax return 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.
- 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.
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum amount of credit per quarter is $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC’s main influences are:
- How much business income dropped compared to 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much did the employer pay each employee in health insurance?
To receive the ERC, employers must submit forms to the IRS. 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 is not available forever. It began in March 2019 and will finish in September 2020. The employer is required to claim ERCs before they expire, or are no longer available. The employer has to spend the money efficiently and not waste. Employee Retention Credit Lookback Period
Here is more information about the ERC and its calculation.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. Credit amounts vary depending on when they are claimed. 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. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The following table summarizes rules and thresholds to determine employer size.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages and Health Insurance Costs
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Lookback Period
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||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||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)||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 and Report Credit
For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. 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 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows the employer also to claim ERCs in current or future quarters. The employer can use Form 941 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 Lookback Period
- Any excess credit can be carried forward to the next quarter
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d to declare the credit amount claimed for each quarter
- Line 13f should be used to report any advance payments made by the IRS.
- If you need to receive an advance payment, use Line 24.
- You can report excess credit on Line 25 for the following quarters.
- Sign and date Form 941 and attach any supporting documents or schedules
You can find some helpful tips on how to fill out Form 941 here:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
The Form 941X can be used to make corrections or adjustments on an earlier 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 Lookback Period
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- 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
- Use Line 26 to report any credit or refund due to the ERC claim.
- 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:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Lookback Period
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- For clarifications or help, you can contact the IRS.
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. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit Lookback Period
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 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. 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.
Employee Retention Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.
The ERC (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. 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.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. 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 you need clarification or assistance, you can contact the IRS.
ERCs can be a huge help to your organization or business and its employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thank you for reading. Stay safe.
Employee Retention Credit Lookback Period
What is the ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
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. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
Below are some details about eligibility.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
What is the ERC worth?
The amount ERC received by a business or organization will depend upon several factors.
Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. If you want a more detailed explanation, read the above article.
How do I claim my ERC?
To claim the ERC an employer must submit a federal employment reform (Form 941)-X or a revised employment tax return to 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 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. 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.