Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. 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 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.
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? Gaap Accounting For 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 was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
The Main Features and Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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. Gaap Accounting For 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 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 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.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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.
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 qualify for ERC despite business suspensions or revenue decreases.
A government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or 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
- Certain businesses have curfews that limit their hours of operations
- Limits in capacity that restrict the number or clients that a business can serve
- Travel bans and restrictions that restrict the ability for a company to transport services or goods
To determine if a business was fully or partially suspended by a government order, an employer must consider:
- The nature and scope of the order and how it affects the operations of the business
- The length and frequency of your order and the way it corresponds to the calendar quarters
- 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 from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 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 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 can include:
- Sales of goods and Services
- Dividends (rents), royalties and interest
- Gifts, donations, and contributions Gaap Accounting For Employee Retention Credit
- Membership fees and dues
- Gross income from trades or businesses
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
- 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 reported on your federal income tax form for 2019
Recovery Startup Business
Recovery startup businesses are those that:
- Start any new business or occupation after February 15, 2019,
- If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery Startup Businesses are still subject to some restrictions and special rules.
- The maximum credit amount per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The main factors that affect the ERC are:
- How much business income dropped 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
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will check the forms and give the money to the employer. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.
The ERC is not available forever. It began in March 2019 and will finish in September 2020. Employers must claim their ERC before they expire or become unavailable. The employer has to spend the money efficiently and not waste. Gaap Accounting For Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
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 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 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 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 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. Table 1 summarizes and gives examples of rules in various scenarios. Gaap Accounting For Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||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||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)||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
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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 also allows the employer to claim the ERC for current or future quarters. 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.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Gaap Accounting For Employee Retention Credit
- Carry forward any excess credit to subsequent quarters
The employer should:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
- Use Line 13d when reporting the credit for each quarter.
- Use Line 13f to report any advance payments of the credit received from the IRS
- Use Line 24 to request a credit advance if necessary
- 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:
- 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.
- For clarifications or help, you can contact the IRS.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. Form 941-X can be used by the employer to: Gaap Accounting For Employee Retention Credit
- Claim a credit or refund for the taxes you overpaid by claiming 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.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- The IRS has provided worksheets to help you calculate the ERC.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- 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.
- 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, and attach any supporting documentation or schedules
Some tips and resources for filling out Form 941-X are:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Gaap Accounting For Employee Retention Credit
- After making a correction or finding an error, you should file Form 941X.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. The end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Gaap Accounting For 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.
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. 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 cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can contact the IRS for help or clarification, or you could consult a tax expert.
ERCs are a powerful tool that can help your company or organization, as well as 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. Thanks for reading and please stay safe.
Gaap Accounting For Employee Retention Credit
What is the ERC?
Employee Retention Credit: This is a credit that employers can claim if they retained employees 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.
Is everyone eligible for the ERC?
The ERC is not available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
More details are available above. But here are some of the highlights.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- 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 an organization or business receives depends on several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. You can read the article above for a more detailed explanation of how ERC is calculated.
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.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
When is the Deadline for Filing the ERC Forms?
The deadlines for filing ERC forms for Forms 941 and form 941 X 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. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.