COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
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 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 the Employee Retention Credit? Kentucky Revenue Employee Retention Credit
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 has been created by the CARES Act for 2020. It was further extended and modified with subsequent legislation in 2021, 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
Main Features & 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 limit will vary depending on when the credit is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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. Kentucky Revenue 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.
- Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- 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 also request an advance payment of the credit by filing Form 7200.
To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:
- The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
- 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
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 qualify for ERC despite business suspensions or revenue decreases.
A government order will either fully or partially suspend an organization or business if:
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order has an impact on the business or organization
- The order applies to all calendar quarters in 2020 and 2021
Here are some examples of government orders that can result in a business being suspended:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- Businesses are restricted in their operating hours by curfews
- 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
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 duration, frequency of the orders and their alignment with the four quarters calendar.
- 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 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 are:
- Sales of goods and Services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions, gifts, grants, and donations Kentucky Revenue Employee Retention Credit
- Membership fees and dues
- Gross profits from trades and businesses
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
- 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 startup that is in recovery can be defined as
- Start any new business or occupation after February 15, 2019,
- Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be 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.
- 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
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC is affected primarily by:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- 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 must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will review the forms and pay the money back to the employer. The 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 won’t be around forever. The ERC will expire in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer also has to use the money wisely and not waste it. Kentucky Revenue Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount depends on the period for which you claim it. 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|
Number of Employees
The number of employees affects the definition and calculation of qualified wages and health insurance costs 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)
Earnings and Costs of Health Insurance
Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms 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 of qualified wages, health insurance costs and employer size depends on the time period. The table below summarizes rules and examples in different scenarios. Kentucky Revenue 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|
Claim and Report the Credit
For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). 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 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use the Form 941 for:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Kentucky Revenue Employee Retention Credit
- Carry over any excess credit into the following quarter
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 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 for any advance payment received from IRS.
- If you need to receive an advance payment, use Line 24.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 include:
- 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.
- For clarifications or help, you can contact the IRS.
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: Kentucky Revenue Employee Retention Credit
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correction of errors or omissions on Form 941 which affect credit amount claimed
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- 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 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- 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:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Kentucky Revenue Employee Retention Credit
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- For clarifications or help, you can contact the IRS.
Deadline and Statute of Limitations
The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example, Q1 2020 (January-March) Form 941 will be due on April 30, 2021. The employer can still file Form 941 if they have deposited their taxes on time. The end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Kentucky Revenue Employee Retention Credit
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.
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 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. The ERC credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
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 will not be available indefinitely, and it has a set deadline and statute of limitations. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.
ERC can have a significant impact on your business, organization, and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thank you for reading. Stay safe.
Kentucky Revenue Employee Retention Credit
What is ERC and what does it do?
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.
Are all ERC applicants eligible?
The ERC is not available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- Their gross receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
How much does the ERC cost?
The amount of ERC a company or organization receives will depend on several factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. The article above provides a detailed explanation on how ERC is calculated.
How to claim your ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
When is the Deadline for Filing the ERC Forms?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
For Form 941 is generally the last day of the month following the end of each quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.