The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. This article will explain what the ERC is, how it works, and how to claim it for different time periods and eligibility criteria.
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)? Irs Cares Act Employee Retention 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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.
The Main Features and Benefits
- Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
- The percentage and the limit vary depending on the time period for which the credit 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. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Irs Cares Act Employee Retention Credit
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also 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.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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 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.
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses qualify for ERC despite business suspensions or revenue decreases.
A government order may suspend a business, or even partially suspend it.
- The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order has an impact on the business or organization
- This order is applicable to any calendar quarter of 2020 or 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
- Businesses are restricted in their operating hours by curfews
- Limits in capacity that restrict the number or clients that a business 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 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
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 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 defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period 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.
- Contributions are gifts, donations and grants Irs Cares Act Employee Retention Credit
- Membership fees and dues
- Gross revenue from businesses or trades
To calculate and compare gross revenue for different quarters using the following:
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
- For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on 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.
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit available per quarter is $50,000
- The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amounts and Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The main factors that affect the ERC are:
- How much an employer’s company was affected by the pandemic.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- The amount of money paid by the employer to each employee as well as their health insurance during pandemic
In order to receive the ERC from the IRS, the employer will need to complete some forms. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will review the forms and pay the money back to the employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC will not be available indefinitely. It began in March 2019 and will finish in September 2020. Employers must claim their ERC before they expire or become unavailable. The employer also has to use the money wisely and not waste it. Irs Cares Act Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. Credit amounts vary depending on when they are claimed. The table below summarises key features and differences for the ERC in each time frame:
|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 and type of employees can affect the definition and calculation for qualified wages and health care costs. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. The table below summarizes the rules and thresholds for determining employer size in 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 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 wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The following table provides a summary of the rules for different scenarios. Irs Cares Act 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|
Claiming and Reporting the 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 will need to declare the qualified wages paid and the health insurance expenses paid for eligible employees. They must also report the credit claimed.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. The employer can use the Form 941 for:
- Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Irs Cares Act Employee Retention Credit
- You can carry forward any credit balance to subsequent 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
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d when reporting the credit for each quarter.
- Use Line 13f to declare any advance payments received from the 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 Form 941, date it and attach any documents or schedules that you wish to include.
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
- The IRS website has updated FAQs on the ERC and Form 941.
- Need clarification? Contact an IRS agent or tax professional.
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use the Form 941 X to: Irs Cares Act Employee Retention Credit
- Claim your refund or credit due to overpaid taxes by claiming 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 version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- The IRS has provided worksheets to help you calculate the ERC.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- 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 report any additional amount of credit claimed for each quarter
- Use Line 26 to report any credit or refund due to the ERC claim.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
Tips and resources on how to complete Form 941 X include:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Irs Cares Act Employee Retention Credit
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on 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. 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. Irs Cares Act Employee Retention Credit
The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. 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.
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 is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC 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 does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. 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 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. We thank you for reading. Please stay safe.
Irs Cares Act Employee Retention Credit
What is ERC and what does it do?
Employee Retention Credit: This is a credit that employers can claim if they retained employees during the COVID-19 pandemic.
The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 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.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- 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.
How much is ERC?
The amount of ERC an organization or business receives depends on 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 the ERC?
To claim the ERC an employer must submit a federal employment reform (Form 941)-X or a revised employment tax return to the IRS.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
When is ERC’s deadline?
The deadlines of Form 941, Form 941X and ERC 941 are different.
The last day to submit Form 941 for each quarter is the last calendar month. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.