COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
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 has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. 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? Quickbooks Payroll 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, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. 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 Advantages
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. 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. Quickbooks Payroll Employee Retention Credit
- The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
- 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. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. By submitting Form 7020, employers can request an early payment of their credit.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
- 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.
In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses may qualify for ERC regardless of revenue or business suspension.
A government order will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or organization
- The order will apply to any calendar month in 2020 or even 2021
These are some examples:
- Stay-at-home orders that restrict non-essential businesses from operating
- Businesses are restricted in their operating hours by curfews
- Limits in capacity that restrict the number or clients that a business 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 nature and scope of the order and how it affects the operations of the business
- The length and frequency of your order and the way it corresponds to the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
A business or organization is considered to have experienced a significant decline in gross receipts if:
- The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
- The gross receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 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 include the following:
- Sales of goods & services
- Rents, dividends, and annuities are examples of income streams that include interest, dividends.
- Contributions are gifts, donations and grants Quickbooks Payroll Employee Retention Credit
- Membership fees and dues
- Gross business income
To compare gross receipts between different quarters of the year, employers must use:
- The same method for accounting (cash-based or accrual-based) that was used to file the federal income Tax return 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
- Start any new business or occupation after February 15, 2019,
- 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
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 available per quarter is $50,000
- Only wages paid during the third and fourth quarters in 2021 are eligible for this credit
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is affected primarily by:
- How much business income dropped compared to 2019.
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- What the employer paid each employee for their health insurance and during the 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 money can be used by the employer to pay for health insurance, to pay employees, or refunds on payroll taxes.
ERCs are not available forever. The ERC began in March 2020, and it will end in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer must also spend the money properly and not waste any of it. Quickbooks Payroll Employee Retention Credit
You can find more information below on ERC calculation and credit amount.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The amount of credit depends on the time frame for which it’s claimed. The following table summarizes and compares the ERC’s main features for each period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. The size of an employer depends on its number of FTEs and the time period. The following table summarizes rules and thresholds to determine employer size.
|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 wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wage includes tips and bonuses, as well as severance, pays, sick leave payments, family leave payments and other types of 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. The table below summarizes rules and examples in different scenarios. Quickbooks Payroll 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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
Form 941 reports the quarterly federal tax liability of an employer, including income tax and Medicare taxes. Form 941 allows the employer also to claim ERCs in current or future quarters. The employer can use the Form 941 for:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Quickbooks Payroll Employee Retention Credit
- Carry forward any excess credit to subsequent quarters
The employer should:
- Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d to report the amount of credit claimed for each quarter
- Use Line 13f to report any advance payments of the credit received from the IRS
- Use Line 24 to request a credit advance if necessary
- Report any credit balance that may be carried forward into the next quarter using Line 25
- Sign the form 941, and attach any supporting documents.
Here are some tips and resources to help you fill out Form 941:
- Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
- The IRS website has updated FAQs on the ERC and Form 941.
- If you need clarification or assistance, contact the IRS or an accountant.
The Form 941 X is used for corrections and adjustments to a Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use the Form 941 X to: Quickbooks Payroll Employee Retention Credit
- Claim refunds or credits for taxes overpaid due to the ERC
- Report any additional wages or health insurance costs that are paid to employees who are eligible but not reported on Form 951.
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest Form 941-X which reflects all the updates and changes made to the ERC by new laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- 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.
- Line 25 is the place to enter any additional credit claims for each quarter.
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
The following are some resources and tips for filling in Form 941X.
- You must file a separate 941X form for each quarter you are correcting or adjusting. Quickbooks Payroll 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.
- Need clarification? Contact an IRS agent or tax professional.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following each quarter. 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. After the end of the quarterly period. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Quickbooks Payroll Employee Retention Credit
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For 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 employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.
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 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. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.
ERCs are a powerful tool that can help your company or organization, as well as your employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thanks for reading and please stay safe.
Quickbooks Payroll Employee Retention Credit
What is ERC?
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, 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.
Who is eligible for the ERC?
ERC eligibility is not universal. 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.
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- 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.
- You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.
How much does the ERC cost?
The amount ERC received by a business or organization will depend upon several factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. You can read the article above for a more detailed explanation of how ERC is calculated.
How to claim ERC?
To claim ERC benefits, an employer needs to file Form 941X or federal employment tax reform with the IRS.
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 for filing ERC forms for Forms 941 and form 941 X are different.
Form 941 deadline is typically the last of the month following each quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. It is also possible to choose a date of two years following the date on which the tax was paid.