COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. 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? How To Apply For Employee Retention Credit Adp
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, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. The ERC is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
Main Features and Advantages
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The credit amount and percentage vary according to the time period in which it is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. 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 To Apply For Employee Retention Credit Adp
- 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 may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. 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. The credit can be requested in advance by employers using Form 7200.
To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
- The 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.
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses 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 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:
- Stay-at-home orders that restrict non-essential businesses 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, frequency, and timing of the order in relation to the quarters of the year.
- The impact of an order on revenue and expenses
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 revenue for any quarter of 2021 was less than 80% that for the same period 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.
- Donations, contributions, grants and gifts How To Apply For Employee Retention Credit Adp
- Dues and fees for membership
- Gross profit from business or trade
To compare gross revenues for different quarters an employer can use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- The same sources of income that it reported on its federal income tax return for 2019
Recovery Startup Business
A recovery startup business is a business that:
- After February 15, 2020, you can start any business or trade.
- Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined
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 credit per quarter will be $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and Calculation
There are different ERC rules and amounts for different employers and periods of time. The main factors that affect the ERC are:
- How much an employer’s company was affected by the pandemic.
- How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
- What the employer paid each employee for their health insurance and during the pandemic
To receive the ERC, employers must submit forms to the IRS. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible 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 is not available forever. The ERC will expire in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer should also make sure to not waste the money. How To Apply For Employee Retention Credit Adp
Below you will find detailed information on ERC, including the amount of credit and the calculation.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of credit depends on the time frame for which it’s claimed. The following table summarizes the key features and differences of the ERC for each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. 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 paid to eligible employees during a period of business suspension or revenue decline. 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 calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table summarizes the rules and examples for different scenarios: How To Apply For Employee Retention Credit Adp
|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 the Credit and Report It
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 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 is used by the employer to claim ERC for the current quarter or future. Form 941 is used by employers 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 How To Apply For Employee Retention Credit Adp
- Carry forward any excess credits to future quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f to report any advance payments of the credit received from the IRS
- If you need to receive an advance payment, use Line 24.
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941, attaching any supporting documents, schedules, or schedules.
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
- For clarifications or help, you can contact the IRS.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use Form 941-X to: How To Apply For Employee Retention Credit Adp
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date Form 941, and attach any supporting documentation or schedules
The following are some resources and tips for filling in Form 941X.
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted How To Apply For Employee Retention Credit Adp
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- For clarifications or help, you can contact the IRS.
Deadline and Statute of Limitations
The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. The employer can still file Form 941 if they have deposited their taxes on time. The end of the quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, How To Apply For Employee Retention Credit Adp
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 employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and costs of health insurance paid to eligible workers. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC has a time limit and deadline for claiming. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC can make a big difference for your business or organization and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article aims to provide you with more information about the ERC. We thank you for reading. Please stay safe.
How To Apply For Employee Retention Credit Adp
What is an ERC?
Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.
The CARES Act created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.
Are all ERC applicants eligible?
ERCs are not available to all. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
More details are available above. But here are some of the highlights.
- A government-issued order temporarily or permanently suspended the organization or business 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.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much does the ERC cost?
The amount ERC received by a business or organization will depend upon 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. If you want a more detailed explanation, read the above article.
How to claim the 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 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?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The last day to submit Form 941 for each quarter is the last calendar month. 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.