COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some payroll costs.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. 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 Maryland
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
Main Features & Benefits
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Employee Retention Credit Maryland
- The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
- 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. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. By submitting Form 7020, employers can request an early payment of their credit.
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 employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses can qualify for the ERC regardless of business suspension or revenue decline.
A government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order has a direct impact on the operations of an organization or business
- The order applies to any calendar quarter in 2020 or 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-athome orders restrict non-essential enterprises from operating
- 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 restrictions or bans that impact the ability of an organization to transport goods and services
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The duration and frequency of the order and how it coincides with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 2019
- The gross receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 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 are:
- Sales of goods and services
- Interest, dividends, rents, royalties, and annuities
- Donations, contributions, grants and gifts Employee Retention Credit Maryland
- Membership dues
- Gross business income
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
A recovery startup business is a business that:
- After February 15, 2020, you can start any business or trade.
- Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is determined
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 still subject to some restrictions and special rules.
- The maximum amount of credit per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is primarily affected by:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much the employer paid to each employee and their health insurance during the pandemic
To claim the ERC, the employer must fill out and submit a form 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 review the forms and pay the money back to the employer. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.
The ERC will no longer be available. The ERC began in March 2020, and it will end in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer has to spend the money efficiently and not waste. Employee Retention Credit Maryland
The following information provides more details on the ERC credit and how it is calculated.
The ERC was implemented, amended, or terminated by various laws in 2020. The amount of the credit varies according to the time period that it is applied for. The table below summarizes key differences and features of the ERCs for each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
The Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. 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, 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 wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit Maryland
|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 and Report the 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 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 also allows the employer to claim the ERC for current or future quarters. Form 941 allows the employer to do:
- ERC – Reduce the amount the employer is required to pay in taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Maryland
- Carry forward any excess credits to future quarters
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.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Report the amount of credit claimed each quarter using Line 13d.
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 if you require an advance credit payment.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941, and include any supporting documents and schedules.
The following are some resources and tips for filling in Form 941.
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Employee Retention Credit Maryland
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- 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 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 to report any additional amount of credit claimed for 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 Maryland
- After making a correction or finding an error, you should file Form 941X.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end each quarter. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. The employer can still file Form 941 if they have deposited their taxes on time. After the end quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention Credit Maryland
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer submitted Forms 941 on 30 April 2020 and the tax was paid on 30 April 2020, it is now April 2023 before they can file Forms 941-X. 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.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC has a time limit and deadline for claiming. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. For clarifications or help, you can always contact an IRS agent or tax professional.
ERC can have a significant impact on your business, organization, and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article aims to provide you with more information about the ERC. We thank you for reading. Please stay safe.
Employee Retention Credit Maryland
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
Is everyone eligible for the ERC?
ERCs are not available to all. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
You can read more about the criteria here. Here are some highlights.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
How much is the ERC?
The amount ERC received by a business or organization will depend upon several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. If you want a more detailed explanation, read the above article.
How to claim ERC?
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
What is the deadline for submitting the ERC forms?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The last day for Form 941 in most cases is the last month following the end each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It can be as late as two years after you paid the tax, but the later date is the preferred date.