COVID-19, the pandemic that has swept across the globe in recent years, has brought unprecedented challenges and hardships to businesses and organisations around. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.
The ERC 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 the Employee Retention Credit? Synergi Partners 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 established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 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 amount and percentage vary according to the time period in which it 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, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Synergi Partners Employee Retention Credit
- The credit is fully refundable. If the amount of credit exceeds an employer’s liability for payroll tax, the excess will then be paid back to the employer.
- 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.
- 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 as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:
- The employer’s company or organization has been suspended, either fully or partly, by an order of the government due to COVID-19 at a particular calendar quarter in 2020/2021
- The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar quarter in 2019.
In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses 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 restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order affects the operations of the business or organization
- Order applies to any calendar year in 2020 or 21
Some examples of orders from the government that could cause a business to be suspended are:
- Stay-at-home orders restricting non-essential business operations
- Certain businesses are subject to curfews which limit their hours of operation
- Capacity limits that reduce the number of customers or clients that can be served by a business
- 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 scope and nature of the order as well as how it impacts the business.
- The order’s duration, frequency, and alignment with the calendar quarters
- The order’s impact on revenues and expenses
It is considered that a business or organization has experienced a significant drop in gross receipts when:
- 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 can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts include the following:
- Sales of goods & services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions are gifts, donations and grants Synergi Partners Employee Retention Credit
- Dues and fees for membership
- Gross income from trades or businesses
To calculate and compare gross receipts for different quarters, an employer must use:
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes for 2019
- The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
- It is the same income sources that were reported on the federal income tax returns for 2019.
Recovery Startup Business
A recovery startup is a business:
- Began carrying on any trade or business after February 15, 2020,
- Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined
Even if it does not meet the criteria for revenue decline or suspension of business, a recovery startup can still qualify. 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 applicable to wages paid for the third and fourth quarters of 2021
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amounts Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. The ERC is affected by the following main factors:
- How much business income dropped compared to 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?
To claim the ERC, the employer must fill out and submit a form to the IRS. The employer must provide proof of how much they paid their employees for health insurance as well as the ERC. The IRS will then check the forms before giving the money to employers. The employer could use this money to pay health insurance for employees or to get refunds and credits for payroll taxes.
The ERC is not available forever. It began in March 2019 and will finish in September 2020. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer has to spend the money efficiently and not waste. Synergi Partners 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. Credit amounts vary depending on when they are 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 employed affects how wages are calculated and defined, as well as the health insurance premiums for eligible employees. Employers are classified as small or large employers based on their number of full-time workers (FTEs), and the period in which they were employed. 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 and Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. 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 and definition of health insurance and qualified wages are dependent on the size of the employer and the time period. The following table provides a summary of the rules for different scenarios. Synergi Partners Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||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||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)||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
To claim the Employees Retention Credit, an employer must file with the Internal Revenue Service a federal Employment Tax Return (Form941) or a adjusted Employment Tax return (Form941X). The employer has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. The employer can also claim the ERC in Form 941 for future or current 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.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. Synergi Partners Employee Retention Credit
- Any excess credit can be carried forward to the next quarter
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use Line 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d when reporting the credit for each quarter.
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 to request an advance payment of the credit if needed
- Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
- Sign and date Form 941 and attach any supporting documents or schedules
You can find some helpful tips on how to fill out Form 941 here:
- Use online services or electronic filing to submit Form 941 more quickly and securely
- The IRS website has updated FAQs on the ERC and Form 941.
- Contact the IRS or a tax professional for assistance or clarification if needed
The Form 941X can be used to make corrections or adjustments on an earlier Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use the Form 941 X to: Synergi Partners Employee Retention Credit
- Claim a credit or refund for the taxes you overpaid by claiming ERC
- Report additional qualified wages paid and health insurance premiums paid to eligible workers that have not been reported on Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
Employers can avoid common mistakes by filling in Form 941X correctly.
- Use the most recent version of Form 941X, 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 Part 2 for indicating which lines of the Form 941 need to be corrected or adjusted
- Use Part 3 to explain the reason for a correction or adjustment on Form 941
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Use Line 25 for any additional credit claimed each quarter.
- Use Line 26 to report any refund or credit requested due to claiming the ERC
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
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 Synergi Partners Employee Retention Credit
- Fill out Form 941-X immediately after you find an error in Form 941
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
Form 941 must be filed by the last date of the month that follows the end each quarter. For example, Form 941 for Q1 of 2021 (January to March) is due April 30, 2020. If an employer has made all the required deposits for the quarter in a timely manner, they can file Forms 941 on the 10th of the second month. The end of the quarter. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Synergi Partners Employee Retention Credit
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 2020, (January-March), the Form 941 must be filed by April 30th 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. 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 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 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.
This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. You can contact the IRS for help or clarification, or you could consult a tax expert.
The ERC is a great tool for both your business and employees. It will help you to keep your employees, maintain a healthy cash flow, as well as recover from pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Stay safe and thank you for reading.
Synergi Partners Employee Retention Credit
What is the ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls during the COVID-19 Pandemic.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Can everyone apply for ERC?
ERCs are not available to all. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- Their gross receipts in a quarter of 2020 or 2021 are less than the percentage of their gross revenue in the same quarter of 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.
How much is ERC?
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. If you want a more detailed explanation, read the above article.
How to claim ERC
For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).
Employers are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.
When is the Deadline for Filing the ERC Forms?
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. This can also be up to two years, based on the date when the tax is paid.