How Employee Retention Tax Credit Magnet

COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over 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 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 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 describe what the ERC does, how it operates, and explain how to claim it.

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? How Employee Retention Tax Credit Magnet

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 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 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 percentage and limit will vary depending on when the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. How Employee Retention Tax Credit Magnet
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 can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.

> > Click Here to Find Out if You are Eligible for ERC < <

Eligibility Criteria

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

A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 2020 or 2021
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.

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 can be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

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

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order affects the operations of the business or organization
The order applies to all calendar quarters in 2020 and 2021

These are some examples:

Stay-at-home orders prohibiting the operation of non-essential businesses
Certain businesses are subject to curfews which limit their hours of operation
Capacity limits that reduce the number of customers or clients that can be served by a business
Travel bans or restrictions that affect the ability of a business to transport goods or services

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 nature and scope of the order and how it affects the operations of the business
The order’s duration, frequency, and alignment with the calendar quarters
The order’s impact on revenues and expenses

Revenue Decline

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

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 of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.

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

Sales of goods & services
Dividends, rents, and royalties, as well as interest, are all examples of annuities.
Contributions are gifts, donations and grants How Employee Retention Tax Credit Magnet
Membership dues
Gross income from trades or businesses

To calculate and compare gross receipts for different quarters, an employer must use:

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 startup that is in recovery can be defined as

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.

A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. Recovery Startup Businesses are still subject to some restrictions and special rules.

The maximum amount of credit 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
The credit has a cap of 250 million dollars for all startup businesses that are eligible.

> > Click Here to Find Out if You are Eligible for ERC < <

Credit Amounts and Calculation

There are different ERC rules and amounts for different employers and periods of time. 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
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 began in March 2020, and it will end in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. Employers must also use the money well and not waste it. How Employee Retention Tax Credit Magnet

Below you will find detailed information on ERC, including the amount of credit and the calculation.

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The credit amount depends on the period for which you claim it. 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 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 include wages paid to eligible workers during a business suspension or revenue decrease. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other 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. The following table provides a summary of the rules for different scenarios. How Employee Retention Tax Credit Magnet

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

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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.

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. Form 941 is used by employers to:

ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. How Employee Retention Tax Credit Magnet
Carry forward any excess credit to subsequent quarters

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

Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
Use Line 13d when reporting the credit for each quarter.
Use Line 13f for any advance payment received from IRS.
Use Line 24 to request an advance payment of the credit if needed
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
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 online services (e-file or online filing) to submit Form 941, faster and with greater security.
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
Need clarification? Contact an IRS agent or tax professional.

Form 941-X

Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The employer can also claim the ERC retroactively by using Form 941X. Form 941-X can be used by the employer to: How Employee Retention Tax Credit Magnet

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.

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

Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 to explain your corrections or adjustments on Form 941.
Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
Use Line 25 to claim any additional credit for each quarter.
Use Line 26 to report any credit or refund due to the ERC claim.
Sign and date the Form 941 X and add any supporting documents or schedules.

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

You must file a separate 941X form for each quarter you are correcting or adjusting. How Employee Retention Tax Credit Magnet
You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
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. The employer can still file Form 941 if they have deposited their taxes on time. After the end quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. How Employee Retention Tax Credit Magnet

The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For 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 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 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 has a time limit and deadline for claiming. 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.

ERCs can be a huge help to your organization or business and its 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. Thanks for reading and please stay safe.

> > Click Here to Find Out if You are Eligible for ERC < <

How Employee Retention Tax Credit Magnet

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, 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?

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.

You can read more about the criteria here. Here are some highlights.

A government order has suspended the business or organization (wholly or partially) 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.
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 a company or organization receives will depend on several 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 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.

When is ERC’s deadline?

There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).

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