Hurricane Disaster Employee Retention Credit

The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 explain the ERC, how it functions, and how you can 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? Hurricane Disaster 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 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’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.

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 credit limit and percentage are dependent on the period of time for which you claim the credit. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Hurricane Disaster Employee Retention Credit
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. By submitting Form 7020, employers can request an early payment of their credit.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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
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 be eligible for ERC regardless of their revenue decline or suspension.

Business Suspension

A government order can either suspend or fully suspend a company or organization if the following conditions are met:

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order has a direct impact on the operations of an organization or business
The order will apply to any calendar month in 2020 or even 2021

Some examples of government orders that can cause a business suspension are:

Stay-athome orders restrict non-essential enterprises from operating
Certain businesses are subject to curfews which limit their hours of operation
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

An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.

The nature and extent of the order, and its impact on the operation of your business
The order’s duration, frequency, and alignment with the calendar quarters
The impact of an order on revenue and expenses

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts if:

The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of the same quarter in 2019.
The gross revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.

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 the following:

Sales of Goods and Services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Donations, contributions, grants and gifts Hurricane Disaster Employee Retention Credit
Membership dues
Gross revenue from businesses or trades

To compare gross receipts between different quarters of the year, employers 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 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
Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is determined

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

Maximum credit per quarter: $50,000
The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
The maximum credit available for startup businesses is $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 is affected by the following main factors:

How much an employer’s company was affected by the pandemic.
What number of employees did the employer have in 2019 and 2020/2021?
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 forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will then check the forms before giving the money to employers. The money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.

The ERC won’t be around forever. The ERC started in March 2020 and ends in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer has to spend the money efficiently and not waste. Hurricane Disaster Employee Retention Credit

Below is more detailed information on the credit amount and calculation of ERC.

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

The 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 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 & Health Insurance Costs

Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.

The calculation and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. This table summarises the rules and provides examples for various scenarios. Hurricane Disaster Employee Retention Credit

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report Credit

To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.

Form 941

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. The employer can also claim the ERC in Form 941 for future or current 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. Hurricane Disaster Employee Retention Credit
You can carry forward any credit balance to subsequent quarters

Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.

Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
The IRS has provided worksheets to help you calculate the ERC.
Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
Use Line 13d to report the amount of credit claimed 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
You can report excess credit on Line 25 for the following quarters.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

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

Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

The Form 941 X is used for corrections and adjustments to a Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use Form 941-X to: Hurricane Disaster Employee Retention Credit

Claim refunds or credits for taxes overpaid due to the ERC
Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.

Use the latest Form 941-X 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 Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 to explain the reason for a correction or adjustment on Form 941
Line 24 should be used to record any additional health insurance and wages paid to employees who qualify.
Use Line 25 to claim any additional credit for 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

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

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Hurricane Disaster Employee Retention Credit
File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
Need clarification? Contact an IRS agent or tax professional.

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. 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. After the end of the quarterly period. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Hurricane Disaster Employee Retention Credit

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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is 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. 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.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. For clarifications or help, you can always contact an IRS agent or tax professional.

ERC can have a significant impact on your business, organization, and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thank you for reading, and stay safe.

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Hurricane Disaster Employee Retention Credit

What is the ERC?

Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls 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.

Does everyone qualify for the ERC program?

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.

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

A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same 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 rate?

The amount of ERC a company or organization receives will depend on several factors.

One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. To learn more about how ERCs are calculated, please read the article.

How do I claim my ERC?

For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).

The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

When is the deadline to file the ERC Forms

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

The deadline for Form 941 is usually the last day in the month after the end of every quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It can be as late as two years after you paid the tax, but the later date is the preferred date.