COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 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 Employee Retention Credit (ERC)? Employee Retention Credit Scams
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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the 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 percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Employee Retention Credit Scams
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- 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. Employers can also request an advance payment of the credit by filing Form 7200.
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
- 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
Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses may qualify for ERC regardless of revenue or business suspension.
A government order may suspend a business, or even partially suspend it.
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order has a direct impact on the operations of an organization or business
- This order is applicable to any calendar quarter of 2020 or 2021
Here are some examples of government orders that can result in a business being suspended:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- Curfews are restrictions on the hours that certain businesses can operate
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- 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 magnitude and impact of the order upon the revenue and expenses of a business
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for 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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts are:
- Sales of goods & services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Gifts, donations, and contributions Employee Retention Credit Scams
- Membership fees and dues
- Gross income from trades or businesses
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
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
A startup that is in recovery can be defined as
- Begun carrying on any business after February 15th, 2020
- Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be determined
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. There are certain limitations and rules that apply to recovery startups businesses.
- 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
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amounts and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC is affected by the following main factors:
- How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much each employee received from their employer and how they were covered by health insurance in 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 examine the forms to determine if the employer is eligible and then pay him the money. 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 will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Scams
Here is more information about the ERC and its calculation.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. The table below summarises key features and differences for the ERC in each time frame:
|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 and type of employees can affect the definition and calculation for qualified wages and health care costs. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. The 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 and 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 earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. This table summarises the rules and provides examples for various scenarios. Employee Retention Credit Scams
|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 the Credit
For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. The employer will need to declare the qualified wages paid and the health insurance expenses paid for eligible employees. They must also report the credit claimed.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 can be used by the employer to:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit Scams
- You can carry forward any credit balance to subsequent quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- 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 to declare the credit amount claimed 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
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 include:
- Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
- The IRS website has updated FAQs on the ERC and Form 941.
- Contact the IRS or a tax professional for assistance or clarification if needed
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use the Form 941 X to: Employee Retention Credit Scams
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest Form 941-X 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 Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- 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.
Here are some tips and resources to help you fill out Form 941X:
- Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Scams
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- 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
The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit Scams
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 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
Employee Retention 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. 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. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC is a great tool for both your business and employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article aims to provide you with more information about the ERC. Thanks for reading and please stay safe.
Employee Retention Credit Scams
What is an ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Is everyone eligible for the ERC?
ERC isn’t available to everyone. 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 suspended the business (fully or partly) because of the COVID-19 epidemic.
- 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.
- 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.
What is the ERC worth?
The amount of ERC an organization or business receives depends on several factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim ERC
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
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.
What is the deadline for submitting 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. This can also be up to two years, based on the date when the tax is paid.