Employee Retention Credit

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The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.

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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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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

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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.

The Main Features and Benefits

  • The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
  • The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit
  • 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. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
  • Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. Employers can also request an advance payment of the credit by filing Form 7200.

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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 business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
  • 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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

  • The order restricts commerce, travel or group meetings because of COVID-19
  • The order impacts the operations of a business or organization
  • The order applies to all calendar quarters in 2020 and 2021

Examples of government orders which can lead to a suspension of business include:

  • Stay-athome orders restrict non-essential enterprises from operating
  • Certain businesses are subject to curfews which limit their hours of operation
  • Limits to the number of clients or customers that a company can serve
  • Travel bans and restrictions that restrict the ability for a company to transport services or goods

Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:

  • The scope and nature of the order as well as how it impacts the business.
  • The duration and frequency of the order and how it coincides with the calendar quarters
  • The impact of an order on revenue and expenses

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts 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 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 amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts include the following:

  • Sales of goods and services
  • Dividends, rents, and royalties, as well as interest, are all examples of annuities.
  • Gifts, donations, and contributions Employee Retention Credit
  • Dues and fees for membership
  • Gross income from trades or businesses

To compare gross revenues for different quarters an employer can use:

  • It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 income that it reported on its federal income 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
  • 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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.

  • The maximum credit per quarter will be $50,000
  • The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
  • The credit is subject to an overall cap of $250 million for all recovery startup businesses

Employee Retention Credit

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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 primarily affected by:

  • How much an employer’s company was affected by the pandemic.
  • How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
  • 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 employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.

The ERC will not be available indefinitely. It started in March 2020 and will end in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer has to spend the money efficiently and not waste. Employee Retention Credit

You can find more information below on ERC calculation and credit amount.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. Credit amounts vary depending on when they are 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. The size of an employer depends on its number of FTEs and the time period. The following table summarizes the thresholds and rules for determining the employer size for each time period:

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

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

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

 

Earnings and Costs of Health Insurance

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 include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. This table summarises the rules and provides examples for various scenarios. Employee Retention Credit

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

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

Form 941

Form 941 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 can be used by the employer to:

  • ERC reduces taxes that employers have to deposit at the IRS.
  • You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Employee Retention Credit
  • 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 941 which reflects updates and changes in the ERC.
  • Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
  • Use Line 1c to report on the health insurance and wages that eligible employees have received.
  • Use Line 13d to declare the credit amount claimed for each quarter
  • Use Line 13f for any advance payment received from IRS.
  • Use Line 24 if you require an advance credit payment.
  • Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
  • Sign the form 941, and attach any supporting documents.

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

  • Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
  • Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
  • If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use Form 941-X to: Employee Retention Credit

  • Claim your refund or credit due to overpaid taxes by claiming the ERC
  • Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
  • Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed

To avoid making common errors and fill out the Form 941-X correctly, employers should:

  • Use the latest form 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 to indicate which lines of Form 941 are being corrected or adjusted
  • Use Part 3 for explaining why form 941 has been corrected or adjusted
  • Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
  • 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 the form 941-X, date it and include any documents or schedules that you wish to attach.

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

  • Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit
  • 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
  • Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The deadline to submit Form 941 is usually the last day in the month following each quarter. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end of the quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Credit

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 of 2020 (January through March), the deadline for Form 941 to be filed was 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.

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Conclusion

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 is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. 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.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. 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. If you need clarification or assistance, you can contact the IRS.

ERCs are a powerful tool that can help your company or organization, as well as your employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. We thank you for reading. Please stay safe.

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Employee Retention Credit

What is an ERC?

Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.

The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.

Who is eligible for the ERC?

ERCs are not available to all. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

  • A government-issued order temporarily or permanently suspended the organization or business 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.
  • These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.

What is the ERC worth?

The amount of ERC an organization or business receives depends on several factors.

These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. If you want a more detailed explanation, read the above article.

How to claim the ERC?

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

Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.

When is the Deadline for Filing the ERC Forms?

The deadlines for filing Forms 941 and 941-X are different.

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 can be as late as two years after you paid the tax, but the later date is the preferred date.

Employee Retention. Credit

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COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, 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 first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. This article will provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

erc-logo

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

Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees affected by COVID-19. The ERC has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

Main Features and Advantages

  • Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
  • The credit amount and percentage vary according to the time period in which it is claimed. 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, 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
  • The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
  • Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
  • Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers may also request an advanced payment of the credit using Form 7200.

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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.

A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses can be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

A government order will either fully or partially suspend an organization or business if:

  • 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
  • The order will apply to any calendar month in 2020 or even 2021

Here are some examples of government orders that can result in a business being suspended:

  • Stay-at-home orders restricting non-essential business operations
  • Curfews are restrictions on the hours that certain businesses can operate
  • Limits on the capacity of a business that limit how many customers or clients it can serve
  • Travel bans and restrictions that restrict the ability for a company to transport services or goods

Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:

  • The scope and nature of the order as well as how it impacts the business.
  • The order’s duration, frequency, and alignment with the calendar quarters
  • The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts if:

  • 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 refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts consist of:

  • Sales of Goods & Services
  • Rents, dividends, and annuities are examples of income streams that include interest, dividends.
  • Contributions are gifts, donations and grants Employee Retention. Credit
  • Membership dues
  • Gross income from trades or businesses

To calculate and compare gross revenue for different quarters using the following:

  • The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
  • The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
  • It is the same income sources that were reported on the federal income tax returns 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

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery Startup Businesses are still subject to some restrictions and special rules.

  • Maximum credit per quarter: $50,000
  • The credit is only available for wages paid in the third and fourth quarters of 2021
  • All recovery startup businesses are subject to an aggregate cap of $250,000,000.

Employee Retention. Credit

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Credit Amount Calculation

There are different ERC rules and amounts for different employers and periods of time. The ERC is affected primarily by:

  • How much of the employer’s income was affected in 2019 by the pandemic.
  • How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
  • How much each employee received from their employer and how they were covered by health insurance in the pandemic

To claim the ERC, the employer must fill out and submit a form to the IRS. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will then check the forms before giving the money to employers. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.

The ERC is not available forever. The ERC will expire in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. Employers must also use the money well and not waste it. Employee Retention. Credit

Here is more information about the ERC and its calculation.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. Credit amounts vary depending on when they are 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 eligible employees will affect the calculation and definition of health insurance and qualified wages. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. 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 are wages that eligible employees receive during periods of suspension or decline in revenue. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.

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

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

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 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

Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use the Form 941 for:

  • ERC reduces taxes that employers have to deposit at the IRS.
  • Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Employee Retention. Credit
  • Carry forward any excess credits to future quarters

The employer should:

  • Use the latest version 941 which reflects updates and changes in the ERC.
  • Use the IRS worksheets and instructions to calculate and report the ERC
  • Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
  • Use Line 13d to report the amount of credit claimed for each quarter
  • Use Line 13f to report any advance payments of the credit received from the IRS
  • Use Line 24 to request an advance payment of the credit if needed
  • Report any credit balance that may be carried forward into the next quarter using Line 25
  • Sign and date Form 941, and include any supporting documents and schedules.

You can find some helpful tips on how to fill out Form 941 here:

  • Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
  • You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
  • You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer may use Form 941 to: Employee Retention. Credit

  • Claim refunds or credits for taxes overpaid due to the ERC
  • Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
  • Correction of errors or omissions on Form 941 which affect credit amount claimed

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

  • Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
  • Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
  • Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
  • Use Part 3 for explaining why form 941 has been corrected or adjusted
  • Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
  • Use Line 25 to claim any additional credit for each quarter.
  • Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
  • Sign and date the Form 941 X and add any supporting documents or schedules.

Some tips and resources for filling out Form 941-X are:

  • File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention. Credit
  • 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
  • Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

Form 941 must be filed by the last date of the month that follows the end each quarter. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. 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 of the quarterly period. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Employee Retention. Credit

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an 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 Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.

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 is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.

Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. 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 be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Thank you for reading, and stay safe.

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Employee Retention. Credit

What is 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, 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.

Does everyone qualify for the ERC program?

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.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

  • The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
  • 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.
  • 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.

What is the ERC worth?

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 do I claim my 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).

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

When is the deadline to file the ERC Forms

The deadlines of Form 941, Form 941X and ERC 941 are different.

For Form 941 is generally the last day of the month following the end of each quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It is also possible to choose a date of two years following the date on which the tax was paid.

Employee Retention Credit,

erc-review

COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over 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.

The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.

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.

erc-logo

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,

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

Main Features and Benefits

  • The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
  • The credit amount and percentage vary according to the time period in which it is claimed. 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 will be 70%, and the limit per quarter is $7,000 for each employee. 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,
  • 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 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. For 2023 only, employers that are classified as recovery startup business can 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. Employers may also request an advanced payment of the credit using Form 7200.

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Eligibility Criteria

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

  • The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
  • 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 may qualify for ERC regardless of revenue or business suspension.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

  • The order limits travel, commerce or group meetings as a result of COVID-19
  • The order affects the operations of the business or organization
  • This order is applicable to any calendar quarter of 2020 or 2021

Examples of government orders which can lead to a suspension of business include:

  • Stay-athome orders restrict non-essential enterprises from operating
  • Curfews that limit the hours of operation for certain businesses
  • Limits on the capacity of a business that limit how many customers or clients it can serve
  • Bans on travel or restrictions on the ability to transport goods or service by a business

Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:

  • The scope and nature of the order as well as how it impacts the business.
  • The order’s duration, frequency, and alignment with the calendar quarters
  • The impact and magnitude of the order to the business’s revenues and costs

Revenue Drop

It is considered that a business or organization has experienced a significant drop in gross receipts when:

  • The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 2019.
  • The gross revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.

Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts are:

  • Sales of Goods and Services
  • Interest, dividends rents royalties and annuities
  • Gifts, donations, and contributions Employee Retention Credit,
  • Membership dues
  • Gross profit from business or trade

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

  • Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
  • For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
  • The same sources of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A recovery startup business is a business that:

  • Start any new business or occupation after February 15, 2019,
  • 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
  • The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
  • All recovery startup businesses are subject to an aggregate cap of $250,000,000.

Employee Retention Credit,

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Credit Amounts Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The ERC’s main influences are:

  • How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
  • How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
  • How much each employee received from their employer and how they were covered by health insurance in the pandemic

Employers must complete and send IRS forms to claim ERC. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.

ERCs are not available forever. The ERC started in March 2020 and ends 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,

The following information provides more details on the ERC credit and how it is calculated.

Time Period

The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount depends on the period for which you claim it. 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. 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)

 

Earnings and Costs of Health Insurance

Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.

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,

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 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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 can be used by the employer to:

  • ERC – Reduce the amount the employer is required to pay in taxes.
  • Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Employee Retention Credit,
  • Any excess credit can be carried forward to the next quarter

The employer should:

  • Use the latest version 941 which reflects updates and changes in the ERC.
  • 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
  • Use Line 13d to declare the credit amount claimed for each quarter
  • Use Line 13f to declare any advance payments received from the IRS.
  • Use Line 24 to request an advance payment of the credit if needed
  • Report any credit balance that may be carried forward into the next quarter using Line 25
  • Sign the form 941, and attach any supporting documents.

Tips and resources on how to complete Form 941 include:

  • Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
  • Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
  • You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use Form 941-X to: Employee Retention Credit,

  • Claim your refund or credit due to overpaid taxes by claiming the ERC
  • Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
  • You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

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.
  • Use the IRS worksheets and instructions to calculate and report the ERC
  • Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
  • Use Part 3 to explain your corrections or adjustments on Form 941.
  • Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
  • Use Line 25 to report any additional amount of credit claimed for each quarter
  • Use Line 26 to report any credit or refund due to the ERC claim.
  • Attach any supporting documents and schedules to Form 941-X.

You can find some helpful tips on how to fill out the Form 941-X here:

  • Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Employee Retention Credit,
  • After making a correction or finding an error, you should file Form 941X.
  • The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
  • 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 example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. Following 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,

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 on June 15, 2020, the deadline for filing Form 941-X 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.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC has a time limit and deadline for claiming. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. You can also contact the IRS or a tax professional for assistance or clarification if needed.

ERCs are a powerful tool that can help your company or organization, as well as your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading. Stay safe.

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Employee Retention Credit,

What is the ERC?

Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.

The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).

Are all ERC applicants eligible?

Not everyone is eligible for the ERC. 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.

  • The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
  • 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.
  • 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 is ERC?

The amount that an organization or company receives in ERC will depend on many factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. If you want a more detailed explanation, read the above article.

How do I claim my 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.

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

When is the deadline to submit the ERC form?

The deadlines for filing ERC forms for Forms 941 and form 941 X are different.

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

Employee Retention Credit.

erc-review

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset 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. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.

erc-logo

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.

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 established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.

Main Features & 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 percentage and limit will vary depending on when the credit is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit.
  • The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
  • 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
  • Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. By submitting Form 7020, employers can request an early payment of their credit.

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Criteria for Eligibility

Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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.

A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses may qualify for ERC regardless of revenue or business suspension.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

  • The order prohibits travel, group meetings, and commerce due to COVID-19
  • The order will affect the operation of the business or the organization
  • The order applies to any calendar quarter in 2020 or 2021

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

  • Orders to stay at home that prevent non-essential companies from operating
  • Businesses are restricted in their operating hours by curfews
  • 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

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

  • The scope and nature of the order as well as how it impacts 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

Revenue Drop

A business or organization is considered to have experienced a significant decline in gross receipts if:

  • The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 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
  • Rents, dividends, and annuities are examples of income streams that include interest, dividends.
  • Contributions, gifts, grants, and donations Employee Retention Credit.
  • Membership dues
  • Gross profit from business or trade

To compare gross revenues for different quarters an employer can use:

  • The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
  • The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
  • The same sources reported on your federal income tax form for 2019

Recovery Startup Business

A recovery startup business is a business that:

  • Began carrying on any trade or business after February 15, 2020,
  • 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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.

  • The maximum credit available per quarter is $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

Employee Retention Credit.

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Credit Amount and Calculation

ERC amounts and rules vary for different time periods and employers. 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.
  • Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
  • How much each employee received from their employer and how they were covered by health insurance in the pandemic

To receive the ERC, employers must submit forms to the IRS. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will verify the forms, and then give the money to your 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 must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit.

You can find more information below on ERC calculation and credit amount.

Time Period

The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount depends on the period for which you claim it. The table below summarises key features and differences for the ERC in each time frame:

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

 

Number of Employees

The number of employees affects the definition and calculation of qualified wages and health insurance costs 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. 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 Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table summarizes the rules and examples for different scenarios: Employee Retention Credit.

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

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 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

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 the employer also to claim ERCs in current or future quarters. Form 941 is used by employers to:

  • 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.
  • Carry forward any excess credits to future quarters

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

  • Use the latest version 941 which reflects updates and changes in the ERC.
  • Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
  • Use Line 1c to report on the health insurance and wages that eligible employees have received.
  • Use Line 13d to declare the credit amount claimed for each quarter
  • Line 13f is used to report any advance payment of credit received by 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 the form 941, and attach any supporting documents.

You can find some helpful tips on how to fill out Form 941 here:

  • Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
  • You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
  • If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941 X also allows for the employer to claim ERC retroactively. Form 941-X can be used by the employer to: Employee Retention Credit.

  • Claim refunds or credits for taxes overpaid due to the ERC
  • Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
  • The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

The employer should:

  • Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
  • 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 your corrections or adjustments on Form 941.
  • Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
  • Line 25 should be used to declare any additional amount claimed as a credit each quarter
  • Use Line 26 to report any refund or credit requested due to claiming the ERC
  • Sign and date Form 941-X and attach any supporting documents or schedules

You can find some helpful tips on how to fill out the Form 941-X here:

  • For each quarter to be adjusted or corrected, you must submit a different Form 941X. Employee Retention Credit.
  • After making a correction or finding an error, you should file Form 941X.
  • You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
  • For clarifications or help, you can contact the IRS.

Deadline and Statute of Limitations

Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. The employer can still file Form 941 if they have deposited their taxes on time. After the end quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit.

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 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 files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.

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Conclusion

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 (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 is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. 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 contact the IRS for help or clarification, or you could consult a tax expert.

ERCs can be a huge help to your organization or business and its employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from 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.

What is the ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.

The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).

Is everyone eligible for the ERC?

ERC isn’t available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

Below are some details about eligibility.

  • A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
  • The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
  • 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 that a company will receive depends on a number of 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. To learn more about how ERCs are calculated, please read the article.

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 ERC’s deadline?

The deadlines for filing Forms 941 and 941-X are different.

The last day for Form 941 in most cases is the last month following the end each quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.

Employee Retention Credit?

erc-review

The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.

To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.

The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. This article will provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is Employee Retention Credit (ERC)? Employee Retention Credit?

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 established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.

The Main Features and 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 credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit?
  • 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. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
  • Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can request an advance payment by submitting Form 7200.

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Criteria for Eligibility

To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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 be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

  • The order prohibits travel, group meetings, and commerce due to COVID-19
  • The order will affect the operation of the business or the organization
  • The order applies to any calendar quarter in 2020 or 2021

Here are some examples of government orders that can result in a business being suspended:

  • Stay-athome orders restrict non-essential enterprises from operating
  • Certain businesses are subject to curfews which limit their hours of operation
  • Limits on the capacity of a business that limit how many customers or clients it can serve
  • Travel bans and restrictions that restrict the ability for a company to transport services or goods

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

  • 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 order’s impact on revenues and expenses

Revenue Decline

A significant decline in gross revenues is experienced by a business or organization if:

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

Gross receipts 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:

  • Sales of Goods & Services
  • Interest, dividends, rents, royalties, and annuities
  • Donations, contributions, grants and gifts Employee Retention Credit?
  • Membership dues
  • Gross business income

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
  • 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 of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A startup that is in recovery can be defined as

  • You must have started your business after the 15th of February 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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.

  • The maximum credit per quarter will be $50,000
  • The credit is only available for wages paid in the third and fourth quarters of 2021
  • Credits for recovery startups are subject to a maximum of $250 million.

Employee Retention Credit?

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Credit Amounts Calculation

There are different ERC rules and amounts for different employers and periods of time. The ERC’s main influences are:

  • How much an employer’s company was affected by the pandemic.
  • How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
  • What the employer paid each employee for their health insurance and during the pandemic

Employers must complete and send IRS forms to claim ERC. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will review the forms and pay the money back to the employer. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.

The ERC will no longer be available. The ERC will expire in September 2022. Employers must claim their ERC before they expire or become unavailable. Employers must also use the money well and not waste it. Employee Retention Credit?

The following information provides more details on the ERC credit and how it is calculated.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. The table below summarizes key differences and features of the ERCs 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 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, 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 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?

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

To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

Form 941

Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use the Form 941 for:

  • 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?
  • Carry over any excess credit into the following quarter

The employer should:

  • Use the most recent version of Form 941, which reflects any changes or updates to the ERC 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
  • Line 13f is used to report any advance payment of credit received by the IRS
  • Use Line 24 if you require an advance credit payment.
  • You can report excess credit on Line 25 for the following quarters.
  • Sign and date Form 941, and include any supporting documents and schedules.

The following are some resources and tips for filling in Form 941.

  • Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
  • The IRS website has updated FAQs on the ERC and Form 941.
  • You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Employee Retention Credit?

  • Claim a credit or refund for the taxes you overpaid by claiming ERC
  • Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
  • The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

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 Part 2 to indicate which lines of Form 941 are being corrected or adjusted
  • Use Part 3 for explaining why form 941 has been corrected or adjusted
  • Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
  • Use Line 25 to report any additional amount of credit claimed for each quarter
  • Use Line 26 for any refunds or credits due to ERC claims.
  • Sign the form 941-X, date it and include any documents or schedules that you wish to attach.

Some tips and resources for filling out Form 941-X are:

  • Fill out a separate form 941-X per quarter being corrected or recalculated Employee Retention Credit?
  • 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.
  • You can also contact a tax expert or the IRS for clarification or additional assistance.

Deadline and Statute of Limitations

The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. After the end of the quarterly period. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Employee Retention Credit?

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 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 files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.

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Conclusion

The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.

The ERC, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. The ERC is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. You can contact the IRS for help or clarification, or you could consult a tax expert.

The ERC can make a big difference for your business or organization and your 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. Thank you for reading. Stay safe.

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Employee Retention Credit?

What is ERC?

Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.

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.

Does everyone qualify for the ERC program?

The ERC is not available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

The criteria for eligibility is also listed above. For the highlights, please see:

  • A government order imposed a suspension (full or partial) on the business or organization 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.
  • 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 that a company will receive depends on a number of 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. You can read the article above for a more detailed explanation of how ERC is calculated.

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.

When is ERC’s deadline?

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

Form 941 deadline is typically the last of the month following each quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.

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