COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Due to lockdowns and social distancing as well as health and safety measures, many employers have seen their revenues and expenses drop, while operations are disrupted.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. 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 Employee Retention Credit? Statute Of Limitations 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.
Main Features and Advantages
- The credit is a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The credit limit and percentage are dependent on the period of time for which you claim the credit. 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, 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. Statute Of Limitations Employee Retention Credit
- The credit is fully refundable, meaning that if the amount of the credit exceeds the employer’s payroll tax liability, the excess will be paid to the employer as a refund.
- 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. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. Employers can also request an advance payment of the credit by filing Form 7200.
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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
- Employer’s gross receipts in a calendar quarter of 2020 or 2021 was less than 50% or 80% of the gross receipts in the same quarter in 2019.
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 government order may suspend a business, or even partially suspend it.
- The order limits commerce, travel, or group meetings due to COVID-19
- The order has a direct impact on the operations of an organization or business
- The order applies to any calendar quarter in 2020 or 2021
Examples of government orders which can lead to a suspension of business include:
- Orders to stay at home that prevent non-essential companies from operating
- Certain businesses have curfews that limit their hours of operations
- Limits to the number of clients or customers that a company can serve
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
To determine if the business was partially or fully suspended by an official order, employers must consider:
- The order’s nature, scope, and impact on the business
- The order’s duration, frequency, and alignment with 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 in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
- The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.
Gross receipts refer to the total of all money received or accrued during a company’s annual accounting period. Gross receipts are:
- Sales of Goods & Services
- Dividends (rents), royalties and interest
- Gifts, donations, and contributions Statute Of Limitations Employee Retention Credit
- Membership fees and dues
- Gross business income
To compare gross revenues for different quarters an employer can use:
- The same method for accounting (cash-based or accrual-based) that was used to file the 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
- The same sources reported on your federal income tax form for 2019
Recovery Startup Business
Recovery startup businesses are those that:
- Began carrying on any trade or business after February 15, 2020,
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. However, there are some limitations and special rules that apply to recovery startup businesses, such as:
- 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 has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amounts Calculation
ERC amounts and rules vary for different time periods and employers. The ERC is primarily affected by:
- 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 did the employer pay each employee in health insurance?
Employers must complete and send IRS forms to claim 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 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.
The ERC will no longer be available. It started in March 2020 and will end in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer also has to use the money wisely and not waste it. Statute Of Limitations Employee Retention Credit
You can find more information below on ERC calculation and credit amount.
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|
Number of Employees
The number and type of employees can affect the definition and calculation for qualified wages and health care 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 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)
Earnings and Costs of Health Insurance
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Other forms of compensation are also included in qualified wages, such as tips, bonuses and commissions. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The table below summarizes rules and examples in different scenarios. Statute Of Limitations 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
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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
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. The employer can use Form 941 to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Statute Of Limitations Employee Retention Credit
- Any excess credit can be carried forward to the next quarter
To fill out Form 941 correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
- Use Line 13d for the credit claim amount per 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.
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign the form 941, and attach any supporting documents.
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
- Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
- 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. Form 941 X also allows for the employer to claim ERC retroactively. Employers can use Form 941/X for Statute Of Limitations Employee Retention Credit
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correction of errors or omissions on Form 941 which affect credit amount claimed
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 Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Use Line 25 to claim any additional credit for each quarter.
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign and date Form 941-X and attach any supporting documents or schedules
Tips and resources on how to complete Form 941 X include:
- File a separate Form 941-X for each quarter that is being corrected or adjusted Statute Of Limitations Employee Retention Credit
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- Check the IRS website for updates, FAQs, and guidance on Form 941-X and the ERC
- 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. Statute Of Limitations Employee Retention Credit
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer filed Form 941 on April 30, 2020, and paid the tax on June 15, 2020, the deadline for filing Form 941-X is June 15, 2022.
The Employee Retention Credit (ERC) is a valuable tax benefit that can help employers who were affected by the COVID-19 pandemic keep their employees on the payroll and reduce the impact of the pandemic on their businesses or organizations.
The ERC (Eligible Employees Credit) is a tax credit that can vary depending on the time frame, the number and type of employees employed, and the amount paid in wages and insurance to employees eligible for the credit. The ERC may be claimed through IRS Forms 941 and 941X, which require the employer to report the qualified wages paid and the health insurance expenses incurred by each employee.
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. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. You can also contact the IRS or a tax professional for assistance or clarification if needed.
The ERC can make a big difference for your business or organization and your employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article aims to provide you with more information about the ERC. We thank you for reading. Please stay safe.
Statute Of Limitations Employee Retention Credit
What is ERC and what does it do?
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 in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).
Does everyone qualify for the ERC program?
ERC isn’t available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government order imposed a suspension (full or partial) on the business or organization due to COVID-19.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.
What is the ERC worth?
The amount ERC received by a business or organization will depend upon several factors.
Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. To learn more about how ERCs are calculated, please read the article.
How to claim your 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.
Employers must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.
What is the deadline for submitting the ERC forms?
There are two different deadlines to file the ERC Forms: Form 941 (Form 941-X) and Form 941 (941).
The deadline for Form 941 is usually the last day in the month after the end of every quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. This can also be up to two years, based on the date when the tax is paid.