Form 941 Worksheet 1 Employee Retention Credit

The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.

To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.

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 explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.

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? Form 941 Worksheet 1 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 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 aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

Main Features and Benefits

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, it is 70%. The limit is $7,000 per quarter per employee. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Form 941 Worksheet 1 Employee Retention Credit
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.
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 may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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
Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses qualify for ERC despite business suspensions or revenue decreases.

Business Suspension

A business or organization is considered fully or partially suspended by a government order if:

The order restricts commerce, travel or group meetings because 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

These are some examples:

Orders to stay at home that prevent non-essential companies 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
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 and frequency of the order and how it coincides with the calendar quarters
The order’s impact on revenues and expenses

Revenue Drop

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 for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019

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

Sales of goods & services
Dividends, rents, and royalties, as well as interest, are all examples of annuities.
Gifts, donations, and contributions Form 941 Worksheet 1 Employee Retention Credit
Membership fees and dues
Gross income from trades or businesses

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

Use the same method (cash or accrual accounting) as it used when filing its federal income taxes 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

Recovery startup businesses are those that:

Start any new business or occupation after February 15, 2019,
Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is determined

If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

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

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Credit Amount and Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is affected by the following main factors:

How much of the employer’s income was affected in 2019 by the pandemic.
The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
The amount of money paid by the employer to each employee as well as their health insurance during pandemic

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 check the forms and give the money to the employer. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.

ERCs are not available forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. Employers must also use the money well and not waste it. Form 941 Worksheet 1 Employee Retention Credit

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

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of the credit varies according to the time period that it is applied for. 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 and type of employees can affect the definition and calculation for qualified wages and health care costs. 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 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 wages refer to wages paid during a period when the business is suspended or revenues are declining. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wages include health insurance costs for eligible employees such as co-pays and 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. Form 941 Worksheet 1 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 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 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. Form 941 can be used by the employer to:

ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Form 941 Worksheet 1 Employee Retention Credit
Carry forward any excess credit to subsequent quarters

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

Use the latest version 941 which reflects updates and changes in the ERC.
The IRS has provided worksheets to help you calculate the ERC.
Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
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 if you require an advance credit payment.
Use Line 25 to report any credit excess that can be carried over to the next quarter.
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
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 may use Form 941 to: Form 941 Worksheet 1 Employee Retention Credit

Claim a credit or refund for the taxes you overpaid by claiming ERC
Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed

The employer should:

Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 of Form 941 to explain why it is being amended or corrected
Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
Line 25 is the place to enter any additional credit claims for each quarter.
Use Line 26 for any refunds or credits due to ERC claims.
Sign and date Form 941-X and attach any supporting documents or schedules

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

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Form 941 Worksheet 1 Employee Retention Credit
After making a correction or finding an error, you should file Form 941X.
Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
You can also contact a tax expert or the IRS for clarification or additional assistance.

Deadline and Statute of Limitations

The deadline to submit Form 941 is usually the last day in the month following each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. 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. The following quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Form 941 Worksheet 1 Employee Retention Credit

The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. If an 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 Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.

The ERC (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. The ERC 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.

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 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 is a great tool for both your business and 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. Thank you for reading. Stay safe.

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Form 941 Worksheet 1 Employee Retention Credit

What is ERC?

Employee Retention Credit: This is a credit that employers can claim if they retained employees 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).

Are all ERC applicants eligible?

ERCs are not available to all. 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.
Their gross receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 2019.
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.

What is the ERC worth?

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

Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. The article above provides a detailed explanation on how ERC is calculated.

How do I claim my ERC?

To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) 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 of Form 941, Form 941X and ERC 941 are different.

The last day for Form 941 in most cases is the last month following the end each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It is also possible to choose a date of two years following the date on which the tax was paid.