How To Apply For The Employee Retention Tax Credit

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.

Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.

The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. 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 Employee Retention Credit (ERC)? How To Apply For The Employee Retention Tax Credit

Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC 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 a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
The percentage and the maximum credit vary depending on how long the credit can be claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, the percentage is 70%, and the limit is $7,000 per employee per quarter. 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. How To Apply For The Employee Retention Tax 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

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

The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
The employer’s gross receipts for a calendar quarter in 2020 or 2021 were less than 50% (for 2020) or 80% (for 2021) of its gross receipts for 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 qualify for the ERC regardless of business suspension or revenue decline.

Business Suspension

A government order will either fully or partially suspend an organization or business if:

The order limits commerce, travel, or group meetings due to COVID-19
The order has an impact on the business or organization
The order applies to all calendar quarters in 2020 and 2021

Some examples of orders from the government that could cause a business to be suspended are:

Orders to stay at home that prevent non-essential companies from operating
Businesses are restricted in their operating hours by curfews
Limits to the number of clients or customers that a company can serve
Bans on travel or restrictions on the ability to transport goods or service by a business

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 length and frequency of your order and the way it corresponds to the calendar quarters
The magnitude and impact of the order upon the revenue and expenses of a business

Revenue Drop

It is considered a significant decrease in gross revenue if a business has:

The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 2019
The gross receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 2019.

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

Sales of Goods & Services
Interest, dividends rents royalties and annuities
Gifts, donations, and contributions How To Apply For The Employee Retention Tax Credit
Dues and fees for membership
Gross revenue from businesses or trades

To calculate and compare gross revenue for different quarters using the following:

The same method for accounting (cash-based or accrual-based) that was used to file the 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 revenue that they reported on their federal income tax return in 2019

Recovery Startup Business

A recovery startup is a business:

You must have started your business after the 15th of February 2020
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.

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. There are certain limitations and rules that apply to recovery startups businesses.

Maximum credit per quarter: $50,000
The credit is only available for wages paid in the third and fourth quarters of 2021
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts and Calculation

For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC’s main influences are:

The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
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

Employers must complete and send IRS forms to claim ERC. 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 money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.

The ERC is not available forever. The ERC started in March 2020 and ends in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. Employers must also use the money well and not waste it. How To Apply For The Employee Retention Tax Credit

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

Time Period

The ERC was implemented, amended, or terminated by various laws in 2020. The credit amount depends on the period for which you claim it. 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 affects the calculation of qualified wages for employees and their health insurance costs. The size of an employer depends on its number of FTEs and the time period. The following table summarizes the thresholds and rules for determining the employer size for each time period:

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 wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

The calculation of qualified wages, health insurance costs and employer size depends on the time period. The table below summarizes rules and examples in different scenarios. How To Apply For The Employee Retention Tax 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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Claiming and Reporting the Credit

To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

Form 941

Form 941 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 allows the employer also to claim ERCs in current or future quarters. Form 941 is used by employers to:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. How To Apply For The Employee Retention Tax Credit
Carry forward any excess credits to future quarters

To ensure the correct completion of Form 941, and to avoid common errors:

Use the latest version 941 which reflects updates and changes in the ERC.
For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
Use Line 1c to report on the health insurance and wages that eligible employees have received.
Report the amount of credit claimed each quarter using Line 13d.
Use Line 13f for any advance payment received from IRS.
If you need to receive an advance payment, use Line 24.
Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
Sign the form 941, and attach any supporting documents.

Tips and resources on how to complete Form 941 include:

Form 941 can be submitted faster and more securely by using electronic filing (efile) or online services
Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
Contact the IRS or a tax professional for assistance or clarification if needed

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. The employer can also claim the ERC retroactively by using Form 941X. The employer can use Form 941-X to: How To Apply For The Employee Retention Tax Credit

Claim your refund or credit due to overpaid taxes by claiming the ERC
Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
Correct any errors or omissions you find on Form 941, which may affect your credit claim.

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

Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
Use Part 3 to explain why Form 941 is being corrected or adjusted
Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
Use Line 25 to report any additional amount of credit claimed for each quarter
Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
Sign and date Form 941-X and attach any supporting documents or schedules

You can find some helpful tips on how to fill out the Form 941-X here:

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted How To Apply For The Employee Retention Tax Credit
After making a correction or finding an error, you should file Form 941X.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
You can also contact a tax expert or the IRS for clarification or additional assistance.

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, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. Following the end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, How To Apply For The Employee Retention Tax Credit

Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer submitted Forms 941 on 30 April 2020 and the tax was paid on 30 April 2020, it is now April 2023 before they can file Forms 941-X. 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 credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.

The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. 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.

Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. For clarifications or help, you can always contact an IRS agent or tax professional.

The ERC can make a big difference for your business or organization and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Thank you for reading, and stay safe.

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How To Apply For The Employee Retention Tax Credit

What is an ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll 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?

ERC isn’t available to everyone. It is only available to employers who have retained employees and paid their wages to them between March 13, 2020, and December 31, 2021.

Below are some details about eligibility.

A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period 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.

How much is the ERC?

The amount of ERC that a company will receive depends on a number of factors.

Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.

How to claim ERC

To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.

Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.

When is the Deadline for Filing the ERC Forms?

The deadlines of Form 941, Form 941X and ERC 941 are different.

Form 941 deadline is typically the last of the month following 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.