COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
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 describe what the ERC does, how it operates, and explain how to 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? Mississippi Employee Retention Credit
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. The ERC was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.
Main Features and Advantages
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits 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 set at 50%, while the maximum per employee is set at $5,000. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Mississippi Employee Retention Credit
- 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.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can request an advance payment by submitting 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 business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
- Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period 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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A business or organization is considered fully or partially suspended by a government order if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or organization
- Order applies to any calendar year in 2020 or 21
Examples of government orders which can lead to a suspension of business include:
- Stay-at-home orders prohibiting the operation of non-essential businesses
- Businesses are restricted in their operating hours by curfews
- Limits to the number of clients or customers that a company can serve
- Bans on travel or restrictions on the ability to transport goods or service by a business
An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.
- The scope and nature of the order as well as how it impacts the business.
- The order’s duration, frequency, and alignment with the calendar quarters
- The extent and severity of the impact of the order on the revenues and expenses of the business
A business or organization is considered to have experienced a significant decline in gross receipts if:
- The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 2019.
- The gross receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019
Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts consist of:
- Sales of Goods and Services
- Interest, dividends rents royalties and annuities
- Gifts, donations, and contributions Mississippi Employee Retention Credit
- Membership dues
- Gross profits from trades and businesses
To compare gross revenues for different quarters an employer can use:
- It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 as reported in the federal tax return for 2019
Recovery Startup Business
A startup that is in recovery can be defined as
- 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
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- The maximum credit per quarter will be $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- The maximum credit available for startup businesses is $250 million.
Credit Amount 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 of the employer’s income was affected in 2019 by the pandemic.
- What number of employees did the employer have in 2019 and 2020/2021?
- 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 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 then check the forms before giving the money to employers. 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 started in March 2020 and ends in September 2022. The employer has to claim the ERC before it expires or becomes unavailable. Employers must also use the money well and not waste it. Mississippi Employee Retention Credit
Below you will find detailed information on ERC, including the amount of credit and the calculation.
The ERC was implemented, amended, or terminated by various laws in 2020. 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|
The Number of Employees
The number employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. 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 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 and Health Insurance Costs
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 definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The table below summarizes rules and examples in different scenarios. Mississippi 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 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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 allows the employer to do:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Mississippi Employee Retention Credit
- Carry forward any excess credits to future quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 to request an advance payment of the credit if needed
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign the form 941, and attach any supporting documents.
You can find some helpful tips on how to fill out Form 941 here:
- Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. The employer can also claim the ERC retroactively by using Form 941X. The employer can use Form 941-X to: Mississippi Employee Retention Credit
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
The employer should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Line 25 is the place to enter any additional credit claims for each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Attach any supporting documents and schedules to Form 941-X.
The following are some resources and tips for filling in Form 941X.
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Mississippi Employee Retention Credit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941-X, the ERC, and other forms.
- Contact the IRS or a tax professional for assistance or clarification if needed
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end each quarter. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. The end of the quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Mississippi 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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 (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 is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. The ERC is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC is a great tool for both your business and employees. You can use it to retain employees, keep your cash flowing, and recover after 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.
Mississippi 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.
It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021
Who is eligible for the ERC?
The ERC is not available to everyone. It is only available to employers who have retained employees and paid their wages to them 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.
- 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.
- 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. If you want a more detailed explanation, read the above article.
How to claim 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.
The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.
When is ERC’s deadline?
The deadline for filing the ERC forms is different for Form 941 and Form 941-X.
Form 941 deadline is typically the last of the month following each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It is also possible to choose a date of two years following the date on which the tax was paid.