The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. 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.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 Employee Retention Credit (ERC)? Employee Retention Credit Nanny
The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 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
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The percentage and 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 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 Nanny
- 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.
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers may also request an advanced payment of the credit using Form 7200.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 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.
Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses may qualify for ERC regardless of revenue or business suspension.
A business or organization is considered fully or partially suspended by a government order 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 any calendar quarter in 2020 or 2021
Some examples of government orders that can cause a business suspension are:
- Stay-athome orders restrict non-essential enterprises from operating
- Certain businesses have curfews that limit their hours of operations
- Limits in capacity that restrict the number or clients that a business 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 nature and extent of the order, and its impact on the operation of your business
- The length and frequency of your order and the way it corresponds to 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 for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter 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 are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts can include:
- Sales of goods and services
- Interest, dividends, rents, royalties, and annuities
- Contributions, gifts and grants Employee Retention Credit Nanny
- Membership dues
- Gross revenue from businesses or trades
To compare gross revenues for different quarters an employer can use:
- 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 reported on your federal income tax form for 2019
Recovery Startup Business
Recovery startup businesses are those 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
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startup businesses are subject to certain restrictions and special rules.
- Maximum credit per quarter: $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The maximum credit available for startup businesses is $250 million.
Credit Amount Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is affected by the following main factors:
- How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- What the employer paid each employee for their health insurance and during the pandemic
Employers must complete and send IRS forms to claim ERC. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will check the forms and give the money 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.
The ERC will no longer be available. The ERC started in March 2020 and ends in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Nanny
Below is more detailed information on the credit amount and calculation of ERC.
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 following table summarizes and compares the ERC’s main features for each 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 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 wages refer to wages paid during a period when the business is suspended or revenues are declining. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit Nanny
|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
To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
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. Form 941 is used by employers to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit Nanny
- Carry over any excess credit into the following quarter
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- 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
- Use Line 13f to declare any advance payments received from the IRS.
- Use Line 24 if you require an advance credit payment.
- You can report excess credit on Line 25 for the following quarters.
- Sign the form 941, and attach any supporting documents.
Here are some tips and resources to help you fill out Form 941:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- Contact the IRS or a tax professional for assistance or clarification if needed
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. The employer may use Form 941 to: Employee Retention Credit Nanny
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
The employer should:
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Line 25 is the place to enter any additional credit claims for each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
The following are some resources and tips for filling in Form 941X.
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Nanny
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- 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 for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. 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. The end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit Nanny
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. 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 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. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC is a great tool for both your business and employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thanks for reading and please stay safe.
Employee Retention Credit Nanny
What is the 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, 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?
The ERC is not available to everyone. 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.
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- 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.
- 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 of ERC that a company will receive depends on a number of factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. 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 ERC’s deadline?
The deadlines for filing Forms 941 and 941-X are different.
The last day to submit Form 941 for each quarter is the last calendar month. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. This can also be up to two years, based on the date when the tax is paid.