Is The Employee Retention Credit Taxable Income For California

COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. 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 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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 Employee Retention Credit (ERC)? Is The Employee Retention Credit Taxable Income For California

Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. The ERC was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.

Main Features & Benefits

Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
The percentage and the maximum credit vary depending on how long the credit can be 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, 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. Is The Employee Retention Credit Taxable Income For California
The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
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. Employers can request an advance payment by submitting Form 7200.

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Eligibility Criteria

In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following 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
Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses may qualify for ERC regardless of revenue or business suspension.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order limits commerce, travel, or group meetings due to COVID-19
The order impacts the operations of a business or organization
The order applies to any calendar quarter in 2020 or 2021

Here are some examples of government orders that can result in a business being suspended:

Stay-at-home orders restricting non-essential business operations
Curfews that limit the hours of operation for certain businesses
Limits on the capacity of a business that limit how many customers or clients it can serve
Travel bans and restrictions that restrict the ability for a company to transport services or goods

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 order’s nature, scope, and impact on the business
The duration and frequency of the order and how it coincides with the calendar quarters
The impact of an order on revenue and expenses

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

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

Sales of Goods and Services
Dividends (rents), royalties and interest
Donations, contributions, grants and gifts Is The Employee Retention Credit Taxable Income For California
Membership fees and dues
Gross profits from trades and businesses

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
The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
The same sources reported on your federal income tax form for 2019

Recovery Startup Business

Recovery startup businesses are those that:

After February 15, 2020, you can start any business or trade.
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

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. There are certain limitations and rules that apply to recovery startups businesses.

Maximum credit per quarter: $50,000
The credit is only applicable to wages paid for the third and fourth quarters of 2021
The credit has a cap of 250 million dollars for all startup businesses that are eligible.

> > Click Here to Find Out if You are Eligible for ERC < <

Credit Amounts 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:

How much of the employer’s income was affected in 2019 by the pandemic.
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
How much did the employer pay each employee in health insurance?

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 check the forms and give the money 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.

ERCs are not available forever. The ERC will expire in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. Employers must also use the money well and not waste it. Is The Employee Retention Credit Taxable Income For California

The following information provides more details on the ERC credit and how it is calculated.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount varies depending on the time period for which it is 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 affects the calculation of qualified wages for employees and their health insurance costs. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. 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 wages refer to wages paid during a period when the business is suspended or revenues are declining. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.

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: Is The Employee Retention Credit Taxable Income For California

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 the Credit

For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. The employer 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

Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. 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.
The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Is The Employee Retention Credit Taxable Income For California
Carry forward any excess credit to subsequent quarters

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

Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
Report the amount of credit claimed each quarter using Line 13d.
Use Line 13f to declare any advance payments received from the IRS.
Use Line 24 if you require an advance credit payment.
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign and date Form 941, and include any supporting documents and schedules.

Tips and resources on how to complete Form 941 include:

Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
The IRS website has updated FAQs on the ERC and Form 941.
For clarifications or help, you can contact the IRS.

Form 941-X

The Form 941 X is used for corrections and adjustments to a Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use the Form 941 X to: Is The Employee Retention Credit Taxable Income For California

Claim a refund or credit for overpaid taxes due to claiming the 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.

The employer should:

Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
Use Part 3 for explaining why form 941 has been 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.
You can use Line 26 to request a refund or credit due to claiming ERC.
Sign and date the Form 941 X and add any supporting documents or schedules.

Tips and resources on how to complete Form 941 X include:

File a separate Form 941-X for each quarter that is being corrected or adjusted Is The Employee Retention Credit Taxable Income For California
If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The deadline to submit Form 941 is usually the last day in the month following each quarter. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 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. The end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Is The Employee Retention Credit Taxable Income For California

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 example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.

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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 (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. 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.

If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC has a time limit and deadline for claiming. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.

The ERC can make a big difference for your business or organization and your employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from 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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Is The Employee Retention Credit Taxable Income For California

What is the ERC?

Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.

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.

Are all ERC applicants eligible?

ERC isn’t available to everyone. 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:

The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
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.
These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.

How much does the ERC cost?

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

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. 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 the Deadline for Filing 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 is also possible to choose a date of two years following the date on which the tax was paid.