Employee Retention Credit Reduce Wages

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.

The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.

The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.

For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is the Employee Retention Credit? Employee Retention Credit Reduce Wages

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 was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

Main Features and Advantages

Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
The percentage and limit will vary depending on when the credit is claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Employee Retention Credit Reduce Wages
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:

The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 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.

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.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order limits commerce, travel, or group meetings due to COVID-19
The order will affect the operation of the business or the organization
The order applies to all calendar quarters in 2020 and 2021

These are some examples:

Stay-at-home orders prohibiting the operation of non-essential businesses
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
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 and frequency of the order and how it coincides with the calendar quarters
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

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 receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 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 include the following:

Sales of Goods and Services
Interest, dividends rents royalties and annuities
Contributions are gifts, donations and grants Employee Retention Credit Reduce Wages
Dues and fees for membership
Gross profits from trades and businesses

Employers must use the following formulas to calculate gross receipts and compare them between quarters.

Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
The same sources of revenue that they reported on their federal income tax return in 2019

Recovery Startup Business

A recovery startup is a business:

After February 15, 2020, you can start any business or trade.
If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.

A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. Recovery startups are not exempt from certain rules and restrictions.

The maximum credit amount per quarter is $50,000
The credit can only be used for wages paid between the third and the fourth quarters of 2020
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts and Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The main factors that affect the ERC are:

How much business income dropped compared to 2019.
What number of employees did the employer have in 2019 and 2020/2021?
What the employer paid each employee for their health insurance and during the pandemic

In order to receive the ERC from the IRS, the employer will need to complete some forms. 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 verify the forms, and then give the money to your employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.

The ERC is not available forever. The ERC started in March 2020 and ends in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. Employers must also use the money well and not waste it. Employee Retention Credit Reduce Wages

Below is more detailed information on the credit amount and calculation of ERC.

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The credit amount varies depending on the time period for which it is claimed. 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 employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The following table summarizes rules and thresholds to determine employer size.

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

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

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

Qualified Wages, Health Insurance Costs

Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms 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. The table below summarizes rules and examples in different scenarios. Employee Retention Credit Reduce Wages

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 the Credit and Report It

To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). 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

Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 can be used by the employer to:

ERCs can be used to reduce the amount of tax that an employer must pay to 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 Reduce Wages
Carry forward any excess credits to future quarters

The employer should:

Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
Use Line 13d for the credit claim amount per quarter
Line 13f should be used to report any advance payments made by the IRS.
Use Line 24 to request a credit advance if necessary
Report any credit balance that may be carried forward into the next quarter using Line 25
Sign Form 941, date it and attach any documents or schedules that you wish to include.

Tips and resources on how to complete Form 941 include:

Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use the Form 941 X to: Employee Retention Credit Reduce Wages

Claim your refund or credit due to overpaid taxes by claiming the ERC
Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

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
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
Use Part 3 for explaining why form 941 has been corrected or adjusted
Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
Use Line 25 to report any additional amount of credit claimed 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.

Here are some tips and resources to help you fill out Form 941X:

You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Reduce Wages
Fill out Form 941-X immediately after you find an error in Form 941
Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
If you need clarification or assistance, contact the IRS or an accountant.

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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. The following quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Reduce Wages

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 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X 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 is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.

If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC has a time limit and deadline for claiming. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. You can also contact the IRS or a tax professional for assistance or clarification if needed.

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 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 Reduce Wages

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 in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).

Is everyone eligible for the ERC?

ERC eligibility is not universal. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter in 2019.
These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.

How much does the ERC cost?

The amount of ERC a company or organization receives will depend on several factors.

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

How do I claim my ERC?

To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.

Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.

When is the deadline to file the ERC Forms

The deadlines of Form 941, Form 941X and ERC 941 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. It can be as late as two years after you paid the tax, but the later date is the preferred date.