Employee Retention Credit Tax Implications

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. 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 Tax Implications

The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.

The Main Features and Benefits

Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. 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 Tax Implications
The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back 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. 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 may also request an advanced payment of the credit using Form 7200.

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Eligibility Criteria

To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main criteria:

The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
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.

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.

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 will affect the operation of the business or the organization
Order applies to any calendar year in 2020 or 21

Some examples of government orders that can cause a business suspension are:

Stay-at-home orders that restrict non-essential businesses from operating
Curfews are restrictions on the hours that certain businesses can operate
Limits to the number of clients or customers that a company can serve
Travel restrictions or bans that impact the ability of an organization to transport goods and services

An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.

The order’s nature, scope, and impact on 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 a significant decrease in gross revenue if a business has:

The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.

Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts consist of:

Sales of Goods & Services
Dividends, rents, and royalties, as well as interest, are all examples of annuities.
Contributions, gifts and grants Employee Retention Credit Tax Implications
Membership dues
Gross profit from business or trade

To compare gross receipts between different quarters of the year, employers must use:

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
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 income that it reported on its federal income tax return for 2019

Recovery Startup Business

A recovery startup business is a business that:

After February 15, 2020, you can start any business or trade.
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

It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

The maximum credit available per quarter is $50,000
The credit can only be used for wages paid between the third and the fourth quarters of 2020
The maximum credit available for startup businesses is $250 million.

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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 ERC is affected primarily by:

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
How much did the employer pay each employee in health insurance?

In order to receive the ERC from the IRS, the employer will need to complete some forms. The forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will then check the forms before giving the money to employers. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.

The ERC will no longer be available. 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 has to spend the money efficiently and not waste. Employee Retention Credit Tax Implications

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 credit amount varies depending on the time period for which it is claimed. The following table summarizes and compares the ERC’s main features for each period:

Time Period	Law	Eligible Employers	Credit Rate	Qualified Wages
2020	CARES Act	Employers with business suspension or revenue decline of more than 50%	50% of qualified wages up to $10,000 per employee per year	Wages paid from March 13 to December 31, 2020
Q1-Q3 2021	CAA and ARPA	Employers with business suspension or revenue decline of more than 20%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from January 1 to September 30, 2021
Q3-Q4 2021 (Recovery Startup Business)	ARPA	Recovery startup businesses with average annual gross receipts of no more than $1 million,	70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),	Wages paid from July 1 to December 31, 2021,
Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	ARPA and IIJA	Employers with a revenue decline of more than 90%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from October 1, 2021, to September 30, 2022

Number of Employees

The number affects the calculation of qualified wages for employees and their health insurance costs. 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 table below summarizes all the rules and thresholds that determine an employer’s 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 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 wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.

The calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit Tax Implications

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

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

Form 941

Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. The employer can also claim the ERC in Form 941 for future or current quarters. 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.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit Tax Implications
You can carry forward any credit balance to subsequent quarters

To fill out Form 941 correctly and avoid common errors, the employer should:

Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
Use Line 13d to declare the credit amount claimed for each quarter
Use Line 13f to declare any advance payments received from the IRS.
If you need to receive an advance payment, use Line 24.
Report any credit balance that may be carried forward into the next quarter using Line 25
Sign and date Form 941 and attach any supporting documents or schedules

Tips and resources on how to complete Form 941 include:

Use online services or electronic filing to submit Form 941 more quickly and securely
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
For clarifications or help, you can contact the IRS.

Form 941-X

Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. Form 941-X can be used by the employer to: Employee Retention Credit Tax Implications

Claim your refund or credit due to overpaid taxes by claiming the 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 can avoid common mistakes by filling in Form 941X correctly.

Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
Use the IRS worksheets and instructions to calculate and report the ERC
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
Use Part 3 to explain your corrections or adjustments on Form 941.
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.
Use Line 26 to report any credit or refund due to the ERC claim.
Sign and date the Form 941 X and add any supporting documents or schedules.

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

For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit Tax Implications
If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
Contact the IRS or a tax professional for assistance or clarification if needed

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, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. 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. 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 Tax Implications

The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If an employer 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is 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 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. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.

This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can also contact the IRS or a tax professional for assistance or clarification if needed.

ERCs can be a huge help to your organization or business and its 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.

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Employee Retention Credit Tax Implications

What is the ERC?

Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.

The CARES Act created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.

Is everyone eligible for the ERC?

The ERC is not available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.

Below are some details about eligibility.

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
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 ERC received by a business or organization will depend upon several factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. To learn more about how ERCs are calculated, please read the article.

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 are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.

When is the deadline to submit the ERC form?

The deadline for filing the ERC forms is different for Form 941 and Form 941-X.

The deadline for Form 941 is usually the last day in the month after the end of every quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can be as late as two years after you paid the tax, but the later date is the preferred date.