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 faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. 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 Employee Retention Credit? Section 2301 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’s goal is to encourage employers during a crisis to continue to employ their workers, and to offer them health coverage.
Main Features & Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. For 2023, the percentage will be 70% for the two first quarters and 40% for the two last quarters. The limit per employee per quarter is $10,000. Section 2301 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.
- 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. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. Employers may also request an advanced payment of the credit using Form 7200.
Employers who wish to qualify for Employee Retention Credit (ERC) must meet 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.
The recovery startup rule also applies to businesses that began operating after February 14, 2020 and had average annual gross receipts not exceeding $1 million. These businesses 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 prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or organization
- This order is applicable to any calendar quarter of 2020 or 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-athome orders restrict non-essential enterprises from operating
- 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
- Bans on travel or restrictions on the ability to transport goods or service by a business
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.
- How the nature and scope and the order affect the operation of the business
- The length and frequency of your order and the way it corresponds to the calendar quarters
- The magnitude and impact of the order upon the revenue and expenses of a business
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts of any calendar quarter in 2020 are less than half the gross receipts of 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 are:
- Sales of goods & services
- Interest, dividends, rents, royalties, and annuities
- Gifts, donations, and contributions Section 2301 Employee Retention Credit
- Membership fees and dues
- Gross profit from business or trade
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
The recovery startup business is one that:
- Begun carrying on any business after February 15th, 2020
- If you have average annual gross revenues of less than $1 million in any three tax-year period that ends with the tax-year preceding the calendar quarter for credit determination.
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 will only be available to employees who have paid wages in the third quarter and fourth of 2021
- All recovery startup businesses are subject to an aggregate cap of $250,000,000.
Credit Amounts and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The main factors that affect the ERC are:
- 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.
- 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?
The employer has to fill out some forms and send them to the IRS to claim the ERC. The forms have to show how much the employer paid to their employees and their health insurance and why they qualify for the ERC. The IRS will then check the forms before giving the money to employers. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
ERCs are not available forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer should also make sure to not waste the money. Section 2301 Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The credit amount varies depending on the time period for which it is claimed. 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|
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. The table below summarizes all the rules and thresholds that determine an employer’s 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, Health Insurance Costs
Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wages also include the cost of providing health insurance to eligible employees, such as premiums, deductibles, co-pays, and co-insurance.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. The following table summarizes the rules and examples for different scenarios: Section 2301 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
For an employer to claim the Employee retention credit (ERC), they must submit a federal employment return (Form 951) or a revised employment tax report (Form 941X) to the Internal Revenue Service. The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
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. Form 941 can be used by the employer to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. Section 2301 Employee Retention Credit
- Carry forward any excess credits to future quarters
Employers should avoid these common mistakes when filling out Form 941 and ensure that they are filled out correctly.
- Use the latest version 941 which reflects updates and changes in the ERC.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d when reporting the credit for each quarter.
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 if you require an advance credit payment.
- Report any credit balance that may be carried forward into the next quarter using Line 25
- Sign and date Form 941 and attach any supporting documents or schedules
Some tips and resources for filling out Form 941 are:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- For clarifications or help, you can contact the IRS.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Section 2301 Employee Retention Credit
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- Correct any mistakes or omissions made on Form 941 that affect the amount of credit claimed
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
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 to explain why Form 941 is being 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 to report any credit or refund due to the ERC claim.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
Here are some tips and resources to help you fill out Form 941X:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. Section 2301 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
- You can also contact a tax expert or the IRS for clarification or additional assistance.
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. The end of the quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, Section 2301 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 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 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 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 is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC can be claimed by filing Form 941 or Form 941-X with the IRS and reporting the qualified wages and health insurance costs and the amount of credit claimed for each quarter.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
The ERC is a great tool for both your business and employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thank you for reading. Stay safe.
Section 2301 Employee Retention Credit
What is ERC?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
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
Can everyone apply for ERC?
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 has suspended the business or organization (wholly or partially) 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.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
How much does the ERC cost?
The amount that an organization or company receives in ERC will depend on many 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. The article above provides a detailed explanation on how ERC is calculated.
How to claim your 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.
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
The deadlines for filing Forms 941 and 941-X are different.
The last day to submit Form 941 for each quarter is the last calendar month. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It is also possible to choose a date of two years following the date on which the tax was paid.