COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.
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 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 Refund Delays
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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.
The 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 percentage and limit will vary depending on when the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. For 2021, there is a 70% percentage and a limit of $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 Refund Delays
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.
Criteria for Eligibility
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:
- 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
- Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period 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 qualify for ERC despite business suspensions or revenue decreases.
An order of the government can suspend a business or an organization in full or part if it:
- The order restricts the commerce, travel and group meetings that are prohibited by 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 restricting non-essential business operations
- Certain businesses have curfews that limit their hours of operations
- Limits to the number of clients or customers that a company can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The scope and nature of the order as well as how it impacts the business.
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The order’s impact on revenues and expenses
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts are:
- Sales of Goods & Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Donations, contributions, grants and gifts Employee Retention Credit Refund Delays
- Membership fees and dues
- Gross profits from trades and businesses
To compare gross receipts between different quarters of the year, employers must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A recovery startup is a business:
- Begun carrying on any business after February 15th, 2020
- 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
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery Startup Businesses are still subject to some restrictions and special rules.
- The maximum credit amount 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 maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
There are different ERC rules and amounts for different employers and periods of time. The main factors that affect the ERC are:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- The amount of money paid by the employer to each employee as well as their health insurance during pandemic
To receive the ERC, employers must submit forms 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 verify the forms, and then give the money to your employer. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
The ERC is not available forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Refund Delays
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 credit depends on the time frame for which it’s 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|
The Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. The size of an employer depends on its number of FTEs and the time period. The following table summarizes the thresholds and rules for determining the employer size for 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 include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit Refund Delays
|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 the Credit and Report It
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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
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 also allows the employer to claim the ERC for current or future quarters. Form 941 allows the employer to do:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Refund Delays
- Carry over any excess credit into the following quarter
The employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Report the amount of credit claimed each quarter using Line 13d.
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 if you require an advance credit payment.
- 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.
Here are some tips and resources to help you fill out Form 941:
- 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.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X allows employers to claim ERC retroactively. Employers can use Form 941/X for Employee Retention Credit Refund Delays
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- The amount of credit claimed will be affected by any mistakes or omissions in Form 941.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Use Line 25 for any additional credit claimed each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Attach any supporting documents and schedules to Form 941-X.
The following are some resources and tips for filling in Form 941X.
- You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Refund Delays
- After making a correction or finding an error, you should file Form 941X.
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- You can also contact a tax expert or the IRS for clarification or additional assistance.
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end 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. Following the end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Refund Delays
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 the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.
Employee Retention 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 can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. 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.
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 does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. You can also contact the IRS or a tax professional for assistance or clarification if needed.
ERCs are a powerful tool that can help your company or organization, as well as your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thanks for reading and please stay safe.
Employee Retention Credit Refund Delays
What is ERC?
Employee Retention Credit: This is a credit that employers can claim if they retained employees 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).
Does everyone qualify for the ERC program?
ERCs are not available to all. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
How much is the ERC?
The amount of ERC an organization or business receives depends on several 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. You can read the article above for a more detailed explanation of how ERC is calculated.
How to claim the 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 declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
When is ERC’s deadline?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The deadline for Form 941 is usually the last day in the month after the end of every quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.