Employee Retention Credit Qualifications 2023

COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.

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 has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. 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 Qualifications 2023

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, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. 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 limit will vary depending on when the credit is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Employee Retention Credit Qualifications 2023
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 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 can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. Employers can also request an advance payment of the credit by filing Form 7200.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main 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.

There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses can qualify for the ERC regardless of business suspension or revenue decline.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order affects the operations of the business or organization
The order will apply to any calendar month in 2020 or even 2021

Examples of government orders which can lead to a suspension of business include:

Stay-athome orders restrict non-essential enterprises from operating
Curfews that limit the hours of operation for certain businesses
Capacity limits that reduce the number of customers or clients that can be served by a business
Bans on travel or restrictions on the ability to transport goods or service by a business

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

The order’s nature, scope, and impact on the 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

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts if:

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 revenue for any quarter of 2021 was less than 80% that for the same period in 2019.

Gross receipts are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts can include:

Sales of goods & services
Interest, dividends, rents, royalties, and annuities
Contributions, gifts and grants Employee Retention Credit Qualifications 2023
Dues and fees for membership
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.
The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
It is the same income sources that were reported on the federal income tax returns for 2019.

Recovery Startup Business

A recovery startup business is a business that:

After February 15, 2020, you can start any business or trade.
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for 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. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

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 credit has a cap of 250 million dollars for all startup businesses that are eligible.

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Credit Amount Calculation

ERC amounts and rules vary for different time periods and employers. The ERC is affected by the following main factors:

How much of the employer’s income was affected in 2019 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 each employee received from their employer and how they were covered by health insurance in 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 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 not be available indefinitely. It began in March 2019 and will finish in September 2020. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. Employee Retention Credit Qualifications 2023

Here is more information about the ERC and its calculation.

Time Period

Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The amount of the credit varies according to the time period that it is applied for. The following table summarises the main features and differences between the ERCs of 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. This table summarizes thresholds and rules to determine the size of an employer for each period.

Time Period	Small Employer Threshold	Large Employer Threshold
2020	Less than or equal to 100 FTEs in 2019	More than 100 FTEs in 2019
Q1-Q2 2021	Less than or equal to 500 FTEs in 2019	More than 500 FTEs in 2019
Q3-Q4 2021	Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.	More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.

To count FTEs for a given year or quarter, an employer must use the following steps:

Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
Divide the total hours by120and round down to the nearest whole number
Add the number of FTEs from Step One and Step Three for each month in the year or quarter
Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)

Qualified Wages & Health Insurance Costs

Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.

The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The table below summarizes rules and examples in different scenarios. Employee Retention Credit Qualifications 2023

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

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Claim and Report Credit

For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

Form 941

Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 allows the employer also to claim ERCs in current or future quarters. Form 941 is used by employers to:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit Qualifications 2023
Carry forward any excess credit to subsequent quarters

To fill out Form 941 correctly and avoid common errors, the employer 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 11c to report the qualified wages and health insurance costs paid to eligible employees
Use Line 13d when reporting the credit for each quarter.
Use Line 13f to report any advance payments of the credit received from the IRS
Use Line 24 to request a credit advance if necessary
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.

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.
If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941 X also allows for the employer to claim ERC retroactively. The employer may use Form 941 to: Employee Retention Credit Qualifications 2023

Claim refunds or credits for taxes overpaid due to the ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

To avoid making common errors and fill out the Form 941-X correctly, employers should:

Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
Use Part 3 to explain your corrections or adjustments on Form 941.
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 to report any refund or credit requested due to claiming the ERC
Sign and date Form 941-X and attach any supporting documents or schedules

Tips and resources on how to complete Form 941 X include:

Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Qualifications 2023
Fill out Form 941-X immediately after you find an error in Form 941
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
Need clarification? Contact an IRS agent or tax professional.

Deadline and Statute of Limitations

The deadline to submit Form 941 is usually the last day in the month following each quarter. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. After the end quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit Qualifications 2023

The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.

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Conclusion

Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.

The ERC, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC has a time limit and deadline for claiming. 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. For clarifications or help, you can always contact an IRS agent or tax professional.

ERCs can be a huge help to your organization or business and its employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. We thank you for reading. Please stay safe.

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Employee Retention Credit Qualifications 2023

What is ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.

The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).

Can everyone apply for ERC?

The ERC is not available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.

The criteria for eligibility is also listed above. For the highlights, please see:

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
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.
The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.

How much is ERC?

The amount of ERC that a company will receive depends on a number of factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. The article above provides a detailed explanation on how ERC is calculated.

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 report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

When is the deadline to submit the ERC form?

The deadlines for filing ERC forms for Forms 941 and form 941 X are different.

The deadline for Form 941 is usually the last day in the month after the end of every quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It is also possible to choose a date of two years following the date on which the tax was paid.