COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
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The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. This article will explain the ERC, how it functions, and how you can 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 Employee Retention Credit (ERC)? Ready Capital Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected by the COVID-19 pandemic. The ERC is a refundable tax credit that was created by 2020’s CARES Act and has been extended and changed by subsequent legislations of 2021 and 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.
The Main Features and Benefits
- 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 amount and percentage vary according to the time period in which it is claimed. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. Ready Capital Employee Retention Credit
- The credit amount is fully refundable, meaning if the credit exceeds your employer’s tax liability on payroll, you will receive the excess as a reimbursement.
- 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. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. By submitting Form 7020, employers can request an early payment of their credit.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following two main 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
- The employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
A special rule is in place for businesses that have started operating after February 15, 2020, and whose average gross receipts per year are no more than one million dollars. These businesses qualify for ERC despite business suspensions or revenue decreases.
A 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
Here are some examples of government orders that can result in a business being suspended:
- Orders to stay at home that prevent non-essential companies from operating
- Curfews that limit the hours of operation for certain businesses
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
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 order’s nature, scope, and impact on the business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- 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 revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period 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 are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts include:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Gifts, donations, and contributions Ready Capital Employee Retention Credit
- Membership dues
- Gross business income
To compare gross receipts between different quarters of the year, employers must use:
- It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns for 2019.
- The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- The same sources 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.
- 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
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. Recovery startups are not exempt from certain rules and restrictions.
- The maximum amount of credit per quarter is $50,000
- The credit is only available for wages paid in the third and fourth quarters of 2021
- The credit is subject to an overall cap of $250 million for all recovery startup businesses
Credit Amount and Calculation
For different lengths of time, different types of employers and different amounts of ERC, the ERC has different rules. The ERC’s main influences are:
- 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
- The amount of money paid by the employer to each employee as well as their health insurance during pandemic
To receive the ERC, employers must submit forms to the IRS. 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 check the forms and give the money to the employer. 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. It began in March 2019 and will finish in September 2020. 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. Ready Capital 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 varies depending on the time period for which it is 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 affects the calculation of qualified wages for employees and their health insurance costs. 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 following table summarizes the thresholds and rules for determining the employer size for each time period:
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages and Health Insurance Costs
Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table summarizes the rules and examples for different scenarios: Ready Capital Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim and Report the Credit
For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). The employer must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use the Form 941 for:
- ERC – Reduce the amount the employer is required to pay in taxes.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Ready Capital Employee Retention Credit
- Carry forward any excess credit to subsequent quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the newest version of the Form 941, which reflects changes to laws that impact the ERC.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d to declare the credit amount 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
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign the form 941, and attach any supporting documents.
Here are some tips and resources to help you fill out Form 941:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- 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. Employers can use Form 941/X for Ready Capital Employee Retention Credit
- Claim refunds or credits for taxes overpaid due to the ERC
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest version of Form 941-X that reflects the changes and updates made by the laws that affect the ERC
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 to explain your corrections or adjustments on Form 941.
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Line 25 should be used to declare any additional amount claimed as a credit each quarter
- Use Line 26 to report any credit or refund due to the ERC claim.
- Attach any supporting documents and schedules to Form 941-X.
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 Ready Capital Employee Retention Credit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- 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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 2021. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. After the end of the quarterly period. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Ready Capital Employee Retention Credit
Form 941X must be filed within three years of the original filing date or two from the payment date, whichever comes later. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be April 30, 2023. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.
Employee Retention 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 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 credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. 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. If you need clarification or assistance, you can contact the IRS.
The ERC can make a big difference for your business or organization and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thank you for reading. Stay safe.
Ready Capital Employee Retention 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).
Who is eligible for the ERC?
Not everyone is eligible for the ERC. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
The criteria for eligibility is also listed above. For the highlights, please see:
- A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
- Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
- It is a recovery-startup business that has been operating since after February 15, 2020. Their average annual gross receipts are no more than one million dollars.
What is the ERC worth?
The amount of ERC that a company will receive depends on a number of 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. You can read the article above for a more detailed explanation of 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 to file the ERC Forms
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The last day for Form 941 in most cases is the last month following the end each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.