COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, 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 is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. This article will describe what the ERC does, how it operates, and explain how to claim it.
For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.
What is the Employee Retention Credit? Employee Retention Credit Questionnaire
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. 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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
Main Features and 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. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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 Questionnaire
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. The credit can be requested in advance by employers using Form 7200.
Criteria for Eligibility
To qualify for Employee Retention credit (ERC), employers must meet either of 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 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
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 qualify for ERC despite business suspensions or revenue decreases.
A government order will either fully or partially suspend an organization or business if:
- The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order impacts the operations of a business or organization
- This order is applicable to any calendar quarter of 2020 or 2021
Some examples of orders from the government that could cause a business to be suspended are:
- Stay-at-home orders that restrict non-essential businesses from operating
- Certain businesses are subject to curfews which limit their hours of operation
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
To determine if the business was partially or fully suspended by an official order, employers must consider:
- 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 extent and severity of the impact of the order on the revenues and expenses of the 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 refer to the total of all money received or accrued during a company’s annual accounting period. 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 Questionnaire
- 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 of income that it reported on its federal income tax return for 2019
Recovery Startup Business
A recovery startup is a business:
- Began carrying on any trade or business after February 15, 2020,
- 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. There are certain limitations and rules that apply to recovery startups businesses.
- 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 Amounts Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is primarily affected by:
- How much business income dropped compared to 2019.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- How much the employer paid to each employee and their health insurance during the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will then check the forms before giving the money to employers. 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 won’t be around forever. It began in March 2019 and will finish in September 2020. Employers must claim their ERC before they expire or become unavailable. Employers must also use the money well and not waste it. Employee Retention Credit Questionnaire
The following information provides more details on the ERC credit and how it is calculated.
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 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|
Number of Employees
The number affects the calculation of qualified wages for employees and their health insurance costs. 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 table below summarizes the rules and thresholds for determining employer size in each time 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 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 wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. This table summarises the rules and provides examples for various scenarios. Employee Retention Credit Questionnaire
|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 Credit
The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. The employer has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use Form 941 to:
- ERC reduces taxes that employers have to deposit at the IRS.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention Credit Questionnaire
- Carry forward any excess credit to subsequent quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
- Use Line 13d to report the amount of credit claimed for each quarter
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 to request an advance payment of the credit if needed
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 include:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- If you need clarification or assistance, contact the IRS or an accountant.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use the Form 941 X to: Employee Retention Credit Questionnaire
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- 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
- Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign and date Form 941, and attach any supporting documentation or schedules
Tips and resources on how to complete Form 941 X include:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Credit Questionnaire
- After making a correction or finding an error, you should file Form 941X.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- If you need clarification or assistance, contact the IRS or an accountant.
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 should be submitted by April 30, 2019. The employer can still file Form 941 if they have deposited their taxes on time. The following quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Questionnaire
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 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.
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. 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 has a time limit and deadline for claiming. 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. This article aims to provide you with more information about the ERC. Stay safe and thank you for reading.
Employee Retention Credit Questionnaire
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.
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
Are all ERC applicants eligible?
ERC eligibility is not universal. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government order imposed a suspension (full or partial) on the business or organization 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.
- 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.
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. To learn more about how ERCs are calculated, please read the article.
How to claim your ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
When is ERC’s deadline?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The last day for Form 941 in most cases is the last month following the end each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.