The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have experienced reduced revenues, higher expenses, and disruptions to their operations because of lockdowns, distancing from social media, and health-and-safety measures.
The Employee Retention Tax Credit (ERC) is a refundable credit that employers can use to offset payroll costs.
The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. This article will describe what the ERC does, how it operates, and explain how to claim it.
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? Vermont Employee Retention Credit
Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way 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 is designed to encourage employers to retain their employees and offer them health benefits in times of crisis.
Main Features and Benefits
- Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
- The percentage and limit will vary depending on when the credit is claimed. In 2020, the 50% percentage and $5,000 limit per employee is applicable for the entire calendar year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, 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. Vermont 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.
- The credit is available to employers who suffered a significant reduction in gross revenues or a partial or full suspension of operations because of an eligible government order relating COVID-19. For 2023 only, employers that are classified as recovery startup business can claim the credit.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers may also request an advanced payment of the credit using Form 7200.
To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:
- 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.
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 may qualify for ERC regardless of revenue or business suspension.
A government order can either suspend or fully suspend a company or organization if the following conditions are met:
- The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
- The order will affect the operation of the business or the organization
- The order applies to all calendar quarters in 2020 and 2021
Examples of government orders which can lead to a suspension of business include:
- Stay-at-home orders that restrict non-essential businesses from operating
- Certain businesses have curfews that limit their hours of operations
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel restrictions or bans that impact the ability of an organization to transport goods and services
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The nature and scope of the order and how it affects the operations of the business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- 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 in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
- The gross receipts for any calendar quarter in 2021 were less than 80% of its gross receipts for the same quarter in 2019
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 consist of:
- Sales of goods and services
- Interest, dividends, rents, royalties, and annuities
- Donations, contributions, grants and gifts Vermont Employee Retention Credit
- Dues and fees for membership
- Gross business income
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
- 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 income that it reported on its federal income tax return for 2019
Recovery Startup Business
A recovery startup is a business:
- Begun carrying on any business after February 15th, 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. There are certain limitations and rules that apply to recovery startups businesses.
- The maximum credit available 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
- Credits for recovery startups are subject to a maximum of $250 million.
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:
- 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 the employer paid to each employee and their health insurance during the pandemic
To receive the ERC, employers must submit forms to the IRS. The forms must include the total amount paid by the employer to employees, their health insurance coverage and the reasons why they are eligible for the ERC. The IRS will examine the forms to determine if the employer is eligible and then pay him the money. 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 has to spend the money efficiently and not waste. Vermont Employee Retention Credit
Below is more detailed information on the credit amount and calculation of ERC.
In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The credit amount varies depending on the time period for which it is 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 affects the calculation of qualified wages for employees and their health insurance costs. The size of an employer depends on its number of FTEs and the time period. The table below summarizes the rules and thresholds for determining employer size in each time period.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages, Health Insurance Costs
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. 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 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. Vermont 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
For the Internal Revenue Service to grant the Employee Retention credit (ERC), employers must file either a federal tax return for employment (Form 941), or an amended tax return for employment (Form941-X). 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 also allows the employer to claim the ERC for current or future quarters. Form 941 allows the employer to do:
- ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
- Request an advance payment of the ERC if the credit exceeds the taxes that the employer has to deposit Vermont Employee Retention Credit
- You can carry forward any credit balance to subsequent quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the latest version of Form 941 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 Line 1c to report on the health insurance and wages that eligible employees have received.
- Use Line 13d to declare the credit amount claimed for each quarter
- Use Line 13f for any advance payment received from IRS.
- Use Line 24 to request a credit advance if necessary
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign and date Form 941, and include any supporting documents and schedules.
You can find some helpful tips on how to fill out Form 941 here:
- Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
- The IRS website has updated FAQs on the ERC and Form 941.
- If you need clarification or assistance, contact the IRS or an accountant.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use Form 941-X to: Vermont Employee Retention Credit
- Claim a refund or credit for overpaid taxes due to claiming the ERC
- Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
- Correct any errors or omissions you find on Form 941, which may affect your credit claim.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
- Use the IRS worksheets and instructions to calculate and report the ERC
- Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 to report any additional qualified wages and health insurance costs paid to eligible employees
- Line 25 should be used to declare any additional amount claimed as a credit each quarter
- Use Line 26 for any refunds or credits due to ERC claims.
- Sign the form 941-X, date it and include any documents or schedules that you wish to attach.
The following are some resources and tips for filling in Form 941X.
- File a separate Form 941-X for each quarter that is being corrected or adjusted Vermont Employee Retention Credit
- You should fill out Form 941/X as quickly as possible after you have made an adjustment or discovered an error.
- You can find updates, FAQs, and more information on the IRS site about the ERC and Form 941X.
- You can also contact a tax expert or the IRS for clarification or additional assistance.
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. The employer can still file Form 941 if they have deposited their taxes on time. Following the end of the quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Vermont 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), for example, Form 941 is due on April 30, 2020. If an employer files Form 941 by April 30, 2020 and pays the tax on April 30 2020, then the deadline to file Form 941-X will be 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 (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.
The ERC, a refundable credit, varies according to the time period and number of employees as well as the amount of qualified wage and health insurance expenses paid to employees who are eligible. You can claim the ERC by submitting Form 941 to the IRS. This form will ask you for the number of employees, the amount paid in qualified wages and insurance costs each quarter, and how much credit is being claimed.
Don’t miss this chance to get a tax break if your employer meets the ERC criteria. The ERC is not available forever and has a deadline and a statute of limitations for claiming it. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. If you need clarification or assistance, you can contact the IRS.
The ERC is a great tool for both your business and employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of 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.
Vermont Employee Retention Credit
What is an ERC?
Employee Retention Credit (ERC) is a tax incentive for employers that retained their employees on their payrolls 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).
Is everyone eligible for the ERC?
ERC eligibility is not universal. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.
You can read more about the criteria here. Here are some highlights.
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
- 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.
How much is ERC?
The amount that an organization or company receives in ERC will depend on many factors.
These factors include time, the number of employees and the amount of wages that qualify. They also include health insurance costs for eligible employees. For a detailed explanation of ERC, you can read the article mentioned above.
How to claim the ERC?
To claim the ERC, an employer must file a federal employment tax reform or an adjusted employment tax return (Form 941-X) with the IRS.
The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.
When is the deadline to file the ERC Forms
The deadlines of Form 941, Form 941X and ERC 941 are different.
For Form 941 is generally the last day of the month following the end of each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.