COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.
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 Ppp Loan Forgiveness Gross Receipts
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees affected by COVID-19. The ERC has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
Main Features & Benefits
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The credit amount and percentage vary according to the time period in which it is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
- The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
- 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. The credit can be claimed by employers who have been classified as recovery startups only until 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. Employers may also request an advanced payment of the credit using Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main 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 receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for the same quarter in 2019
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses can qualify for the ERC regardless of business suspension or revenue decline.
A business or organization is considered fully or partially suspended by a government order if:
- The order limits commerce, travel, or group meetings due to 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 orders from the government that could cause a business to be suspended are:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- Businesses are restricted in their operating hours by curfews
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Bans on travel or restrictions on the ability to transport goods or service by a business
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and scope of the order and how it affects the operations of the business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The magnitude and impact of the order upon the revenue and expenses of a business
A business or organization is considered to have experienced a significant decline in gross receipts 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 receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019
Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts consist of:
- Sales of goods and services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Donations, contributions, grants and gifts Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
- Membership fees and dues
- Gross revenue from businesses or trades
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
- The same sources reported on your federal income tax form for 2019
Recovery Startup Business
A recovery startup is a business:
- After February 15, 2020, you can start any business or trade.
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum amount of credit per quarter is $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and Calculation
ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is affected primarily by:
- How much an employer’s company was affected by the pandemic.
- How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
- 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 form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will then check the forms before giving the money to employers. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC will no longer be available. It began in March 2019 and will finish in September 2020. Employers must claim their ERC before they expire or become unavailable. The employer also has to use the money wisely and not waste it. Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
Below is more detailed information on the credit amount and calculation of ERC.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount varies depending on the time period for which it is 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|
Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. The table below summarizes all the rules and thresholds that determine an employer’s 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 wages include wages paid to eligible workers during a business suspension or revenue decrease. 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 of qualified wages, health insurance costs and employer size depends on the time period. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
|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 the Credit and Report It
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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
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. The employer can also claim the ERC in Form 941 for future or current 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.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
- Carry forward any excess credit to subsequent quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d for the credit claim amount per quarter
- Use Line 13f to report any advance payments of the credit received from the IRS
- If you need to receive an advance payment, use Line 24.
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941, and include any supporting documents and schedules.
Here are some tips and resources to help you fill out Form 941:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. 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 Ppp Loan Forgiveness Gross Receipts
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correction of errors or omissions on Form 941 which affect credit amount claimed
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Line 25 should be used to declare any additional amount claimed as a credit each quarter
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign and date the Form 941 X and add any supporting documents or schedules.
Tips and resources on how to complete Form 941 X include:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. 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 of the quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 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 (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 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 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 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 be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article should have helped you learn more about ERCs and how to apply for them. We thank you for reading. Please stay safe.
Employee Retention Credit Ppp Loan Forgiveness Gross Receipts
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
Does everyone qualify for the ERC program?
ERC isn’t available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
More details are available above. But here are some of the highlights.
- A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
- Their gross receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
What is the ERC worth?
The amount that an organization or company receives in ERC will depend on many factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. If you want a more detailed explanation, read the above article.
How to claim 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.
The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
What is the deadline for submitting the ERC forms?
The deadlines for filing Forms 941 and 941-X are different.
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 is also possible to choose a date of two years following the date on which the tax was paid.