Employee Retention Credit Supply Chain Disruption Irs

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some 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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.

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 Supply Chain Disruption Irs

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 was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.

Main Features & Benefits

The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit 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. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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 Supply Chain Disruption Irs
The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. By submitting Form 7020, employers can request an early payment of their credit.

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Eligibility Criteria

To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.

A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.

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

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 has an impact on the business or organization
The order applies to any calendar quarter in 2020 or 2021

Some examples of orders from the government that could cause a business to be suspended are:

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

To determine if a business was fully or partially suspended by a government order, an employer must consider:

How the nature and scope and the order affect the operation of the business
The duration, frequency of the orders and their alignment with the four quarters calendar.
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered a significant decrease in gross revenue if a business has:

The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 2019.
The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.

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

Sales of Goods and Services
Interest, dividends, rents, royalties, and annuities
Contributions, gifts and grants Employee Retention Credit Supply Chain Disruption Irs
Membership dues
Gross income from trades or businesses

To calculate and compare gross receipts for different quarters, an employer must use:

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
The same sources as reported in the federal tax return for 2019

Recovery Startup Business

A startup that is in recovery can be defined as

After February 15, 2020, you can start any business or trade.
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined

It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startup businesses are subject to certain restrictions and special rules.

The maximum credit amount per quarter is $50,000
Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
All recovery startup businesses are subject to an aggregate cap of $250,000,000.

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Credit Amount and Calculation

For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC is primarily affected by:

How much business income dropped compared to 2019.
How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
How much did the employer pay each employee in health insurance?

Employers must complete and send IRS forms to claim ERC. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will review the forms and pay the money back to the 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 will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer should also make sure to not waste the money. Employee Retention Credit Supply Chain Disruption Irs

Below you will find detailed information on ERC, including the amount of credit and the calculation.

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of the credit varies according to the time period that it is applied for. The following table summarizes the key features and differences of the ERC 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 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. This table summarizes thresholds and rules to determine the size of an employer for each period.

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

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

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

Qualified Wages and Health Insurance Costs

Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. This table summarises the rules and provides examples for various scenarios. Employee Retention Credit Supply Chain Disruption Irs

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report the 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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

Form 941

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. Form 941 allows the employer to do:

ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Employee Retention Credit Supply Chain Disruption Irs
Carry over any excess credit into the following quarter

Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.

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 for the amount of qualified wages and health benefits paid to eligible employees
Report the amount of credit claimed each quarter using Line 13d.
Use Line 13f to declare any advance payments received from the IRS.
If you need to receive an advance payment, use Line 24.
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign the form 941, and attach any supporting documents.

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

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

Form 941-X

The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The employer can also claim the ERC retroactively by using Form 941X. The employer can use Form 941-X to: Employee Retention Credit Supply Chain Disruption Irs

Claim a credit or refund for the taxes you overpaid by claiming ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed

Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.

Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
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 for any additional qualified wage and health insurance expenses paid to eligible workers
Line 25 is the place to enter any additional credit claims 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.

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

Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit Supply Chain Disruption Irs
File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. After the end quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Supply Chain Disruption Irs

The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. 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.

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Conclusion

Employee Retention (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.

The ERC (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. 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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. 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 contact the IRS for help or clarification, or you could consult a tax expert.

ERC can have a significant impact on your business, organization, and your employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article aims to provide you with more information about the ERC. We thank you for reading. Please stay safe.

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Employee Retention Credit Supply Chain Disruption Irs

What is an ERC?

Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.

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?

The ERC is not available to everyone. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.

Below are some details about eligibility.

A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.

How much is the ERC?

The amount that an organization or company receives in ERC will depend on many 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 your ERC?

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

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

When is the Deadline for Filing the ERC Forms?

There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).

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