Non Refundable Employee Retention Tax Credit

The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.

In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some payroll costs.

The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023.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 provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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)? Non Refundable Employee Retention Tax 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 was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.

Main Features and Benefits

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. 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 will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Non Refundable Employee Retention Tax Credit
The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.

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 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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.

Business Suspension

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

The order limits commerce, travel, or group meetings due to COVID-19
The order has a direct impact on the operations of an organization or business
The order applies to all calendar quarters in 2020 and 2021

Some examples of government orders that can cause a business suspension are:

Stay-at-home orders restricting non-essential business operations
Curfews that limit the hours of operation for certain businesses
Limits to the number of clients or customers that a company can serve
Travel restrictions or travel bans that limit the ability of businesses to transport products or services

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

How the nature and scope and the order affect the operation of the business
The length and frequency of your order and the way it corresponds to the calendar quarters
The order’s impact on revenues and expenses

Revenue Decline

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 revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.

Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts consist of:

Sales of Goods & Services
Dividends, rents, and royalties, as well as interest, are all examples of annuities.
Contributions, gifts and grants Non Refundable Employee Retention Tax Credit
Dues and fees for membership
Gross business income

Employers must use the following formulas to calculate gross receipts and compare them between quarters.

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
For 2019 and 2020/2021, the same quarters of the calendar year that were used for filing federal employment tax returns on Form 941.
It is the same income sources that were reported on the federal income tax returns for 2019.

Recovery Startup Business

A recovery startup business is a business that:

Begun carrying on any business after February 15th, 2020
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

It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startups are not exempt from certain rules and restrictions.

The maximum credit amount per quarter is $50,000
The credit is only available for wages paid in the third and fourth quarters of 2021
All recovery startup businesses are subject to an aggregate cap of $250,000,000.

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Credit Amount Calculation

The ERC has different rules and amounts for different periods of time and different types of employers. The main factors that affect the ERC are:

How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
How much the employer paid to each employee and their health insurance during the pandemic

To claim the ERC, the employer must fill out and submit a form to the IRS. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will then check the forms before giving the money to employers. The employer can then use the money for paying their employees, their health insurance and/or to receive refunds or credits on their payroll tax.

The ERC is not available forever. The ERC started in March 2020 and ends in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer should also make sure to not waste the money. Non Refundable Employee Retention Tax Credit

Below is more detailed information on the credit amount and calculation of ERC.

Time Period

The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount depends on the period for which you claim it. The following table summarizes the key features and differences of the ERC 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

The Number of Employees

The number of eligible employees will affect the calculation and definition of health insurance and qualified wages. The size of an employer depends on its number of FTEs and the time period. 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)

Earnings and Costs of Health Insurance

Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.

The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. The table below summarizes rules and examples in different scenarios. Non Refundable Employee Retention Tax Credit

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim 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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.

Form 941

Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. The employer can also claim the ERC in Form 941 for future or current quarters. 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. Non Refundable Employee Retention Tax Credit
Carry forward any excess credit to subsequent quarters

To fill out Form 941 correctly and avoid common errors, the employer should:

Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to declare the wages and costs of health insurance paid to employees who qualify.
Use Line 13d to report the amount of credit claimed for each quarter
Line 13f should be used to report any advance payments made by the IRS.
Use Line 24 to request an advance payment of the credit if needed
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign and date Form 941, attaching any supporting documents, schedules, or schedules.

Some tips and resources for filling out Form 941 are:

Use electronic filing (e-file) or online services to submit Form 941 faster and more securely
Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
For clarifications or help, you can contact the IRS.

Form 941-X

Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The employer can also claim the ERC retroactively by using Form 941X. The employer can use Form 941-X to: Non Refundable Employee Retention Tax Credit

Claim a refund or credit for overpaid taxes due to claiming the ERC
Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been 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.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
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 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.

Here are some tips and resources to help you fill out Form 941X:

Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted Non Refundable Employee Retention Tax Credit
You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. The end of the quarter. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, Non Refundable Employee Retention Tax Credit

Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is 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.

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Conclusion

Employee Retention (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.

The ERC, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for 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 has a time limit and deadline for claiming. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. For clarifications or help, you can always contact an IRS agent or tax professional.

ERC can have a significant impact on your business, 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.

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Non Refundable Employee Retention Tax Credit

What is an ERC?

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?

ERC isn’t available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

You can read more about the criteria here. Here are some highlights.

A government order suspended the business (fully or partly) because of the COVID-19 epidemic.
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.
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 is the ERC?

The amount of ERC an organization or business receives depends on several factors.

One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. The article above provides a detailed explanation on how ERC is calculated.

How do I claim my ERC?

To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.

Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.

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. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It is also possible to choose a date of two years following the date on which the tax was paid.