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. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.
For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.
What is the Employee Retention Credit? Employee Retention Tax Credit Erc Attorneys
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 is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features and Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The credit amount and percentage vary according to the time period in which it is claimed. 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, 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 Tax Credit Erc Attorneys
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. Employers may also request an advanced payment of the credit using Form 7200.
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.
Additionally, there is an additional rule that only applies to startups who began operating on or after February 15, 2021, and have gross receipts totaling no more than $1.0 million. These businesses may qualify for ERC regardless of revenue or business suspension.
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 has a direct impact on the operations of an organization or business
- Order applies to any calendar year in 2020 or 21
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
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The order’s nature, scope, and impact on the business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The impact of an order on revenue and expenses
It is considered a significant decrease in gross revenue if a business has:
- 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 receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 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 can include:
- Sales of Goods and Services
- Dividends (rents), royalties and interest
- Contributions, gifts, grants, and donations Employee Retention Tax Credit Erc Attorneys
- Membership dues
- Gross revenue from businesses or trades
To compare gross revenues for different quarters an employer can 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 calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- The same sources as reported in the federal tax return for 2019
Recovery Startup Business
Recovery startup businesses are those that:
- You must have started your business after the 15th of February 2020
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
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 startup businesses are subject to certain restrictions and special rules.
- The maximum credit per quarter will be $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC is primarily affected by:
- How much business income dropped compared to 2019.
- What number of employees did the employer have in 2019 and 2020/2021?
- How much did the employer pay each employee in health insurance?
In order to receive the ERC from the IRS, the employer will need to complete some forms. The 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.
ERCs are not available forever. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer must also spend the money properly and not waste any of it. Employee Retention Tax Credit Erc Attorneys
The following information provides more details on the ERC credit and how it is calculated.
The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The amount of credit depends on the time frame for which it’s claimed. The following table summarises the main features and differences between the ERCs of 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|
The Number of Employees
The number and type of employees can affect the definition and calculation for qualified wages and health care costs. The size of an employer depends on its number of FTEs and the time period. The following table summarizes rules and thresholds to determine employer size.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages and Health Insurance Costs
Qualified wages refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The table below summarizes rules and examples in different scenarios. Employee Retention Tax Credit Erc Attorneys
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim and Report the Credit
For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. The employer 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 allows the employer to do:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Tax Credit Erc Attorneys
- Carry over any excess credit into the following quarter
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- The IRS has provided worksheets to help you calculate 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
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 to request an advance payment of the credit if needed
- 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.
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
- The IRS website has updated FAQs on the ERC and Form 941.
- Contact the IRS or a tax professional for assistance or clarification if needed
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use Form 941-X to: Employee Retention Tax Credit Erc Attorneys
- Claim your refund or credit due to overpaid taxes by claiming the ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
- Use Line 25 to report any additional amount of credit claimed for each quarter
- Use Line 26 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.
Tips and resources on how to complete Form 941 X include:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Employee Retention Tax Credit Erc Attorneys
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
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 is due by April 30, 2021. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. Following the end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Employee Retention Tax Credit Erc Attorneys
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 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.
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 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.
If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. For clarifications or help, you can always contact an IRS agent or tax professional.
The ERC is a great tool for both your business and employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. This article aims to provide you with more information about the ERC. Thanks for reading and please stay safe.
Employee Retention Tax Credit Erc Attorneys
What is ERC and what does it do?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Are all ERC applicants eligible?
Not everyone is eligible for the ERC. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
Below are some details about eligibility.
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- The gross receipts 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.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
How much does the ERC cost?
The amount of ERC that a company will receive depends on a number of factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim ERC
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
What is the deadline for submitting the ERC forms?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The deadline for Form 941 is usually the last day in the month after the end of every quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can be as late as two years after you paid the tax, but the later date is the preferred date.