COVID-19 has caused hardships and unprecedented challenges for businesses and organizations all over 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.
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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.
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? Oregon Employee Retention Credit
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees affected by COVID-19. 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.
The Main Features and Benefits
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. 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. Oregon Employee Retention Credit
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- 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. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. Employers can also request an advance payment of the credit by filing Form 7200.
Criteria for Eligibility
To qualify for Employee Retention credit (ERC), employers must meet either of 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
- 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.
There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses can be eligible for ERC regardless of their revenue decline or suspension.
A government order will either fully or partially suspend an organization or business if:
- The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order has a direct impact on the operations of an organization or business
- Order applies to any calendar year in 2020 or 21
These are some examples:
- Stay-at-home orders restricting non-essential business operations
- Businesses are restricted in their operating hours by curfews
- Capacity limits that reduce the number of customers or clients that can be served by a business
- Travel restrictions or bans that impact the ability of an organization to transport goods and 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 duration and frequency of the order and how it coincides with the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same 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 include:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Donations, contributions, grants and gifts Oregon Employee Retention Credit
- Membership fees and dues
- Gross profit from business or trade
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.
- It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
- 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
- Began carrying on any trade or business after February 15, 2020,
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. There are certain limitations and rules that apply to recovery startups businesses.
- 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
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is primarily affected by:
- How much an employer’s company was affected by the pandemic.
- How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
- How much did the employer pay each employee in health insurance?
Employers must complete and send IRS forms to claim ERC. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.
The ERC will not be available indefinitely. 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. Oregon Employee Retention Credit
Here is more information about the ERC and its calculation.
The ERC was implemented, amended, or terminated by various laws in 2020. The amount of credit depends on the time frame for which it’s claimed. 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 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. This table summarizes thresholds and rules to determine the size of an employer for each 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 include wages paid to eligible workers during a business suspension or revenue decrease. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. Table 1 summarizes and gives examples of rules in various scenarios. Oregon 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 the Credit and Report It
To claim the Employee Retention Credit (ERC), an employer must file a federal employment tax return (Form 941) or an adjusted employment tax return (Form 941-X) with the Internal Revenue Service (IRS). 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 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 can be used by the employer to:
- 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. Oregon Employee Retention Credit
- Carry forward any excess credits to future quarters
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 report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d for the credit claim amount per quarter
- Line 13f should be used to report any advance payments made by the IRS.
- Use Line 24 to request a credit advance if necessary
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign and date Form 941, and include any supporting documents and 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
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- Need clarification? Contact an IRS agent or tax professional.
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. Form 941-X can be used by the employer to: Oregon Employee Retention Credit
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC 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 of Form 941 to explain why it is being amended or corrected
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date the Form 941 X and add any supporting documents or schedules.
Here are some tips and resources to help you fill out Form 941X:
- Fill out a separate form 941-X per quarter being corrected or recalculated Oregon Employee Retention Credit
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- 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 to submit Form 941 is usually the last day in the month following each quarter. For Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. Following the end of the quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Oregon 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.
Employee Retention Tax Credit (ERC), is a valuable financial benefit that helps employers to keep their employees employed and reduces the impact COVID-19 has on their organization or business.
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. 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. 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. For clarifications or help, you can always contact an IRS agent or tax professional.
The ERC can make a big difference for your business or organization and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thank you for reading. Stay safe.
Oregon Employee Retention Credit
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?
Not everyone is eligible for the ERC. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
How much is the ERC?
The amount of ERC a company or organization receives will depend on several factors.
Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. To learn more about how ERCs are calculated, please read the article.
How to claim 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.
The employer must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
When is ERC’s deadline?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
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 can also be from two years from the date that the tax was paid, with the later date being the more preferred one.