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.
In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some 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? Tnc Approval Department Employee Retention Credit
Employee Retention Tax Credit (ERC), is a refundable tax credit for organizations and businesses with employees who have been 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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.
The Main Features and Benefits
- The credit is equal to a percentage of qualified wages and health insurance costs paid to eligible employees, up to a certain limit per employee per quarter.
- The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. In 2023, 70% of the employees will be eligible for the first two quarterly limits and 40% in the final two. The limit for each employee is $10,000. Tnc Approval Department Employee Retention Credit
- The credit will be fully refundable if its amount exceeds that of the employer’s payroll taxes.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. 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. Employers can also request an advance payment of the credit by filing Form 7200.
Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 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.
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 may qualify for ERC regardless of revenue or business suspension.
An order of the government can suspend a business or an organization in full or part if it:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or organization
- 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
- Businesses are restricted in their operating hours by curfews
- Limits in capacity that restrict the number or clients that a business can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.
- The nature and extent of the order, and its impact on the operation of your business
- The length and frequency of your order and the way it corresponds to the calendar quarters
- The order’s impact on revenues and expenses
A business or organization is considered to have experienced a significant decline in gross receipts 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 revenues for any calendar-quarter in 2021 will be less than 80 percent of the gross revenue in 2019 for that same quarter.
Gross receipts are defined as the total amount received or accrued by a business or organization from all sources during its annual accounting period without any deductions. Gross receipts include:
- Sales of goods & services
- Dividends (rents), royalties and interest
- Donations, contributions, grants and gifts Tnc Approval Department Employee Retention Credit
- Membership dues
- Gross profit from business or trade
To compare gross revenues for different quarters an employer can use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- Use the same calendar quarters as it did for its federal employment tax return (Form 941 ) for 2019 and 2021/2022
- The same sources of revenue that they reported on their federal income tax return in 2019
Recovery Startup Business
Recovery startup businesses are those that:
- Begun carrying on any business after February 15th, 2020
- Average annual gross receipts not exceeding $1 million during the three-year period ending on the tax year immediately preceding the calendar quarterly for which the credit will be determined
If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum credit available per quarter is $50,000
- The credit is only applicable to wages paid for the third and fourth quarters of 2021
- The credit has a cap of 250 million dollars for all startup businesses that are eligible.
Credit Amount 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:
- How much of the employer’s income was affected in 2019 by the pandemic.
- The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
- 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 form must show the amount the employer paid for their employees’ health insurance, and how they qualified for the ERC. The IRS will verify the forms, and then give the money to your employer. The employer can use the money to pay their employees and their health insurance or to get refunds or credits for their payroll taxes.
The ERC won’t be around forever. It started in March 2020 and will end in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer must also spend the money properly and not waste any of it. Tnc Approval Department Employee Retention Credit
The following information provides more details on the ERC credit and how it is calculated.
The ERC was introduced, amended, and terminated by different laws in 2020, 2021, and 2022. The amount of the credit varies according to the time period that it is applied for. The table below summarises key features and differences for the ERC in each time frame:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number affects the calculation of qualified wages for employees and their health insurance costs. According to the time frame and number of full-time equivalents (FTEs), an employer can be classified as a small employer or large employer. The following table summarizes rules and thresholds to determine employer 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 are wages that eligible employees receive during periods of suspension or decline in revenue. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. Table 1 summarizes and gives examples of rules in various scenarios. Tnc Approval Department 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 Credit
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 must declare the wages and health insurance premiums paid to eligible employees, as well as the credit amount claimed each quarter.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. 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. Tnc Approval Department Employee Retention Credit
- Carry over any excess credit into the following quarter
The employer should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- 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.
- Use Line 13f to declare any advance payments received from the IRS.
- Use Line 24 to request an advance payment of the credit if needed
- You can report excess credit on Line 25 for the following quarters.
- Sign the form 941, and attach any supporting documents.
The following are some resources and tips for filling in Form 941.
- Use online services or electronic filing to submit Form 941 more quickly and securely
- Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
- Contact the IRS or a tax professional for assistance or clarification if needed
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941-X allows employers to claim ERC retroactively. The employer can use Form 941-X to: Tnc Approval Department 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.
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 to explain why Form 941 is being corrected or adjusted
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Line 25 is the place to enter any additional credit claims for each quarter.
- You can use Line 26 to request a refund or credit due to claiming ERC.
- Attach any supporting documents and schedules to Form 941-X.
Tips and resources on how to complete Form 941 X include:
- You must file a separate 941X form for each quarter you are correcting or adjusting. Tnc Approval Department Employee Retention Credit
- File Form 941-X as soon as possible after discovering an error or making an 0adjustment on Form 941
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- For clarifications or help, you can contact the IRS.
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, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. The end of the quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Tnc Approval Department 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 example, Q1 2019 (January to March), Form 941 had to be submitted by April 30, 2019. 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 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 is not available forever and has a deadline and a statute of limitations for claiming it. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can also contact the IRS or a tax professional for assistance or clarification if needed.
ERCs are a powerful tool that can help your company or organization, as well as your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thank you for reading. Stay safe.
Tnc Approval Department Employee Retention Credit
What is an ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
The CARES Act was passed in March 2020. It was amended and extended in December 2020 by the CAA Act (Consolidated Appropriations Act) and in March 2021 by the ARPA Act (American Rescue Plan Act of 2021).
Who is eligible for the ERC?
The ERC is not available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.
The criteria for eligibility is also listed above. For the highlights, please see:
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- Their gross receipts for a calendar quarter in 2020 or 2021 were less than a percentage of their gross receipts for the same quarter in 2019.
- These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.
What is the ERC worth?
The amount ERC received by a business or organization will depend upon several factors.
One of the factors is the length of time the company has been in business, the number and type of employees it has, the amount that qualifies as wages, or the health insurance premiums paid to employees who are eligible. To learn more about how ERCs are calculated, please read the article.
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.
Employers must submit quarterly reports detailing the amounts of the tax credit, the wages paid and the health insurance premiums that they have claimed to be reimbursed.
When is the deadline to file the ERC Forms
The deadlines for filing Forms 941 and 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.