COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
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 has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. 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 the Employee Retention Credit? Employee Retention Credit Verification Letter
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 established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features & Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The credit amount and percentage vary according to the time period in which it is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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 Verification Letter
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- 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 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 employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
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 can qualify for the ERC regardless of business suspension or revenue decline.
An order of the government can suspend a business or an organization in full or part if it:
- The order restricts commerce, travel or group meetings because of COVID-19
- The order will affect the operation of the business or the organization
- 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:
- Orders to stay at home that prevent non-essential companies from operating
- Certain businesses have curfews that limit their hours of operations
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or 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.
- How the nature and scope and the order affect the operation of the business
- The length, frequency, and timing of the order in relation to the quarters of the year.
- The magnitude and impact of the order upon the revenue and expenses of a business
A significant decline in gross revenues is experienced by a business or organization if:
- 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 revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts include the following:
- Sales of goods and Services
- Dividends (rents), royalties and interest
- Gifts, donations, and contributions Employee Retention Credit Verification Letter
- Membership fees and dues
- Gross business income
Employers must use the following formulas to calculate gross receipts and compare them between quarters.
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes 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 of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
A recovery startup is a business:
- Begun carrying on any business after February 15th, 2020
- Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is determined
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit per quarter will be $50,000
- The credit is only applicable to wages paid for the third and fourth quarters of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is primarily affected by:
- How much business income dropped compared to 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much did the employer pay each employee in health insurance?
To claim the ERC, the employer must fill out and submit a form to the IRS. 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 review the forms and pay the money back to the employer. 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. It started in March 2020 and will end 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 Verification Letter
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of credit depends on the time frame for which it’s claimed. 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 employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. The table below summarizes the rules and thresholds for determining employer size in each time period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages, Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of 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 and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. Table 1 summarizes and gives examples of rules in various scenarios. Employee Retention Credit Verification Letter
|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 Credit
To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). 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 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use Form 941 to:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Verification Letter
- You can carry forward any credit balance to subsequent quarters
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- 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
- If you need to receive an advance payment, use Line 24.
- 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
You can find some helpful tips on how to fill out Form 941 here:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941 X also allows for the employer to claim ERC retroactively. The employer may use Form 941 to: Employee Retention Credit Verification Letter
- 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
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
The employer should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your 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:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Credit Verification Letter
- Fill out Form 941-X immediately after you find an error in Form 941
- 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 submitting Form 941 generally falls on the last calendar day of the following month. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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 following quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit Verification Letter
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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.
Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.
The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. 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.
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 is intended to help you better understand the ERC, and how it can be claimed. Thanks for reading and please stay safe.
Employee Retention Credit Verification Letter
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.
Can everyone apply for ERC?
ERCs are not available to all. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
- 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.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much is the ERC?
The amount of ERC an organization or business receives depends on several factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. 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 declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
What is the deadline for submitting the ERC forms?
The deadlines for filing Forms 941 and 941-X are different.
For Form 941 is generally the last day of the month following the end of each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. This can also be up to two years, based on the date when the tax is paid.