Hurricane Employee Retention Tax Credit

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.

To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.

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 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 Employee Retention Tax Credit

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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.

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 credit amount and percentage vary according to the time period in which it is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Hurricane Employee Retention Tax Credit
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 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.
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. By submitting Form 7020, employers can request an early payment of their credit.

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Criteria for Eligibility

Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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 gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.

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 can qualify for the ERC regardless of business suspension or revenue decline.

Business Suspension

A business or organization is considered fully or partially suspended by a government order if:

The order restricts commerce, travel or group meetings because of COVID-19
The order has an impact on the business or organization
The order will apply to any calendar month in 2020 or even 2021

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

Stay-at-home orders that restrict non-essential businesses from operating
Certain businesses are subject to curfews which limit their hours of operation
Capacity limitations that reduce the amount of customers or clientele that a firm can service
Travel bans and restrictions that restrict the ability for a company to transport services or goods

To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:

The order’s nature, scope, and impact on the business
The order’s duration, frequency, and alignment with the calendar quarters
The magnitude and impact of the order upon the revenue and expenses of a business

Revenue Decline

A significant decline in gross revenues is experienced by a business or organization if:

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 are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts include the following:

Sales of Goods and Services
Interest, dividends, rents, royalties, and annuities
Donations, contributions, grants and gifts Hurricane Employee Retention Tax Credit
Membership dues
Gross income from trades or businesses

To compare gross receipts between different quarters of the year, employers must use:

The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return 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 income that it reported on its federal income tax return for 2019

Recovery Startup Business

Recovery startup businesses are those 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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.

The maximum credit per quarter will be $50,000
Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts Calculation

The ERC has different rules and amounts for different periods of time and different types of employers. The ERC’s main influences are:

How much an employer’s company was affected by the pandemic.
How many employees the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
The amount of money paid by the employer to each employee as well as their health insurance during pandemic

The employer has to fill out some forms and send them to the IRS to claim the 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 review the forms and pay the money back to the employer. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.

The ERC won’t be around forever. It started in March 2020 and will end in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. The employer should also make sure to not waste the money. Hurricane Employee Retention Tax Credit

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

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The amount of credit depends on the time frame for which it’s claimed. The table below summarizes key differences and features of the ERCs 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. 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)

Earnings and Costs of Health Insurance

Qualified wages refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.

The calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table summarizes the rules and examples for different scenarios: Hurricane 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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Claim the Credit and Report It

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 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 can be used by the employer to:

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 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 of Form 941 that reflects the changes and updates made by the laws that affect the ERC
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
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
Line 24 is the place to ask for an advance payment if you need it.
Use Line 25 to report any credit excess that can be carried over to the next quarter.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

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

Use online services or electronic filing to submit Form 941 more quickly and securely
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
For clarifications or help, you can contact the IRS.

Form 941-X

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 may use Form 941 to: Hurricane Employee Retention Tax Credit

Claim a credit or refund for the taxes you overpaid by claiming ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.

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

Use the latest version 941-X to reflect the updated laws and regulations that impact 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 to explain why Form 941 is being corrected or adjusted
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 credit or refund due to the ERC claim.
Sign and date Form 941-X and attach any supporting documents or schedules

Some tips and resources for filling out Form 941-X are:

You must file a separate 941X form for each quarter you are correcting or adjusting. Hurricane Employee Retention Tax Credit
File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
For clarifications or help, you can contact the IRS.

Deadline and Statute of Limitations

Form 941 must be filed by the last date of the month that follows the end each quarter. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. 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. After the end of the quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Hurricane 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 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 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 (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.

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.

Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC has a time limit and deadline for claiming. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. You can also contact the IRS or a tax professional for assistance or clarification if needed.

ERCs are a powerful tool that can help your company or organization, as well as your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article aims to provide you with more information about the ERC. Thanks for reading and please stay safe.

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Hurricane Employee Retention Tax Credit

What is the ERC?

Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.

The CARES Act 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.

Can everyone apply for ERC?

ERC isn’t available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.

There are also criteria for eligibility; more details can be read above, but here are the highlights:

A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
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 ERC received by a business or organization will depend upon several factors.

These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.

How to claim 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 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. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. It can be as late as two years after you paid the tax, but the later date is the preferred date.