Refundable Employee Retention Credit

COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. 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.

The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.

The ERC is a program that was introduced by the CARES Act of 2020. Subsequent legislation was passed in 2021 and in 2023 to extend and modify it. 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? Refundable 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, created in 2020 by the CARES Act, was then extended and modified through subsequent legislation in both 2021-2023. The ERC was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.

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 limit will vary depending on when the credit is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. Refundable Employee Retention Credit
The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
Employers may claim the credit if their gross receipts have declined significantly or they have had to suspend operations in whole or part due to a COVID-19-related government order. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. The credit can be requested in advance by employers using Form 7200.

> > Click Here to Find Out if You are Eligible for ERC < <

Eligibility Criteria

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

A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 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.

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

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 will affect the operation of the business or the organization
The order applies to any calendar quarter in 2020 or 2021

Some examples of orders from the government that could cause a business to be suspended are:

Stay-at-home orders prohibiting the operation of non-essential businesses
Curfews are restrictions on the hours that certain businesses can operate
Limits in capacity that restrict the number or clients that a business can serve
Bans on travel or restrictions on the ability to transport goods or service by a business

To determine if a business was fully or partially suspended by a government order, an employer must consider:

The nature and extent of the order, and its impact on the operation of your business
The order’s duration, frequency, and alignment with the calendar quarters
The impact of an order on revenue and expenses

Revenue Decline

A business or organization is considered to have experienced a significant decline in gross receipts if:

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 from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 2019.

Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts include:

Sales of goods & services
Dividends (rents), royalties and interest
Gifts, donations, and contributions Refundable Employee Retention Credit
Membership fees and dues
Gross income from trades or businesses

To calculate and compare gross revenue for different quarters using the following:

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

The recovery startup business is one that:

Start any new business or occupation after February 15, 2019,
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

Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. Recovery Startup Businesses are still subject to some restrictions and special rules.

The maximum credit amount 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.

> > Click Here to Find Out if You are Eligible for ERC < <

Credit Amount Calculation

ERC amounts and rules vary for different time periods and employers. The ERC is affected by the following main factors:

The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
How much each employee received from their employer and how they were covered by health insurance in the 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 review the forms and pay the money back to the employer. 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 has to spend the money efficiently and not waste. Refundable Employee Retention Credit

The following information provides more details on the ERC credit and how it is calculated.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The credit amount depends on the period for which you claim it. The following table summarises the main features and differences between the ERCs of 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 employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. 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)

Qualified Wages & Health Insurance Costs

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 earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

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 following table provides a summary of the rules for different scenarios. Refundable 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

> > Click Here to Find Out if You are Eligible for ERC < <

Claim and Report Credit

The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. 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

Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 is used by employers to:

Reduce the amount of taxes that the employer has to deposit with the IRS by the amount of the ERC
If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Refundable Employee Retention Credit
You can carry forward any credit balance to subsequent quarters

To ensure the correct completion of Form 941, and to avoid common errors:

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
Report the amount of credit claimed each quarter using Line 13d.
Line 13f is used to report any advance payment of credit received by the IRS
Use Line 24 to request a credit advance if necessary
You can report excess credit on Line 25 for the following quarters.
Sign Form 941, date it and attach any documents or schedules that you wish to include.

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
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
Need clarification? Contact an IRS agent or tax professional.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use Form 941-X to: Refundable Employee Retention Credit

Claim a refund or credit for overpaid taxes due to claiming the ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

Employers should avoid these common mistakes when filling out Form 941 X and ensure that they are filled out correctly.

Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
Use the IRS worksheets and instructions to calculate and report the ERC
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
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 for any additional credit claimed each quarter.
Use Line 26 when reporting any refund or credit that you have requested as a result of claiming your ERC
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 Refundable Employee Retention Credit
After making a correction or finding an error, you should file Form 941X.
The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
Need clarification? Contact an IRS agent or tax professional.

Deadline and Statute of Limitations

The deadline for filing Form 941 is generally the last day of the month following the end of each quarter. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. In the event that an employer has deposited the taxes due on time for a particular quarter, Form 941 can be filed by the 10th date of the following month. Following the end of the quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Refundable 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 example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is April 30, 2023. If an employers filed Forms 941 and paid taxes on June 15, 2019, the deadline is June 15, 2022.

> > Click Here to Find Out if You are Eligible for ERC < <

Conclusion

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.

You should not miss the opportunity to benefit from this tax incentive if you are an eligible employer. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. For clarifications or help, you can always contact an IRS agent or tax professional.

ERCs are a powerful tool that can help your company or organization, as well as 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, and stay safe.

> > Click Here to Find Out if You are Eligible for ERC < <

Refundable Employee Retention Credit

What is the ERC?

The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll during the COVID-19 pandemic.

It was created by the CARES Act in March 2020 and was later amended and extended by the CAA (Consolidated Appropriations Act) in December 2020, and the ARPA (American Rescue Plan Act of 2021) in March 2021

Does everyone qualify for the ERC program?

ERCs are not available to all. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

More details are available above. But here are some of the highlights.

A government order has suspended the business or organization (wholly or partially) due to COVID-19.
The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter 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.

What is the ERC rate?

The amount of ERC that a company will receive depends on a number of factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. The article above provides a detailed explanation on how ERC is calculated.

How to claim ERC?

To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

When is the deadline to submit the ERC form?

The deadlines for filing ERC forms for Forms 941 and form 941 X are different.

The deadline for Form 941 is usually the last day in the month after the end of every quarter. In contrast, the deadline to submit Form 941 X is generally set at three years since the date of the original 941. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.