The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation in 2021 and 2023. This article will explain the ERC, how it functions, and how you can claim it.
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 Under The Cares Act
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were 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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features and Benefits
- Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Employee Retention Credit Under The Cares Act
- 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.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- 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. 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 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
- 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
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 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
- The order will apply to any calendar month in 2020 or even 2021
Some examples of government orders that can cause a business suspension are:
- Stay-at-home orders restricting non-essential business operations
- Certain businesses have curfews that limit their hours of operations
- Capacity limits that reduce the number of customers or clients that can be served by a business
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The nature and extent of the order, and its impact on the operation of your business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The order’s impact on revenues and expenses
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- 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 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 include the following:
- Sales of goods and Services
- Dividends (rents), royalties and interest
- Contributions, gifts, grants, and donations Employee Retention Credit Under The Cares Act
- Membership fees and dues
- Gross profit from business or trade
To compare gross receipts between different quarters of the year, employers must use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return for 2019
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
The recovery startup business is one that:
- You must have started your business after the 15th of February 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
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum amount of credit per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The maximum credit available for startup businesses is $250 million.
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 affected by the following main factors:
- 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
- What the employer paid each employee for their health insurance and during the pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will check the forms and give the money 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. It began in March 2019 and will finish in September 2020. 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 Under The Cares Act
The following information provides more details on the ERC credit and how it is calculated.
The ERC was implemented, amended, or terminated by various laws in 2020. 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 of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The 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 wages include wages paid to eligible workers during a business suspension or revenue decrease. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. This table summarises the rules and provides examples for various scenarios. Employee Retention Credit Under The Cares Act
|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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. The employer can also claim the ERC in Form 941 for future or current quarters. The employer can use the Form 941 for:
- 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 Under The Cares Act
- Carry forward any excess credits to future quarters
The employer should:
- Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d for the credit claim amount per quarter
- Use Line 13f to report any advance payments of the credit received from the IRS
- Use Line 24 if you require an advance credit payment.
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
The following are some resources and tips for filling in Form 941.
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- For clarifications or help, you can contact the IRS.
Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941 X also allows for the employer to claim ERC retroactively. The employer may use Form 941 to: Employee Retention Credit Under The Cares Act
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
The employer should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- 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.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
You can find some helpful tips on how to fill out the Form 941-X here:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Under The Cares Act
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- 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. 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. The end of the quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Employee Retention Credit Under The Cares Act
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 2020. If an employer submitted Forms 941 on 30 April 2020 and the tax was paid on 30 April 2020, it is now April 2023 before they can file Forms 941-X. If an employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is 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 (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.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. 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 can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Stay safe and thank you for reading.
Employee Retention Credit Under The Cares Act
What is an ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls 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).
Can everyone apply for ERC?
The ERC is not available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government order has suspended the business or organization (wholly or partially) 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 ERC?
The amount of ERC a company or organization receives will depend on several factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim ERC?
To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.
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.
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 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.