What Is The Cares Employee Retention Credit

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Many employers faced decreased revenues, increased costs, and disruptions of operations as a result of lockdowns.

Employee Retention Credit is a refundable income tax credit available to eligible employers that helps them retain their employees while providing health benefits.

The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. The ERC will be explained in this article, along with how it works and the different eligibility criteria and time periods for which it can be claimed.

For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is the Employee Retention Credit? What Is The Cares 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 was established by the CARES Act of 2020 and extended and modified in subsequent legislations in 2021 and in 2023. The ERC encourages employers to maintain their workers and to provide health benefits to them during the crisis.

Main Features and Advantages

Credits are equal in percentage to the wages and insurance costs that employees who qualify for them have paid, but there is a maximum per employee.
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. For 2021, the percentage is 70%, and the limit is $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. What Is The Cares 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. Alternatively, for 2023 only, employers who are considered recovery startup businesses can also claim the credit.
The credit may be claimed by filing a modified employment tax return (941-X), or by reducing the employment tax deposits to prepare for the credit. The credit can be requested in advance by employers using Form 7200.

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Eligibility Criteria

Employers who wish to qualify for Employee Retention Credit (ERC) must meet two main criteria.

The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
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.

There is also a special rule that applies to recovery startups, which are businesses that started operations after February 15th 2020 with gross receipts no higher than $1,000,000 on average. These businesses qualify for ERC despite business suspensions or revenue decreases.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order restricts the commerce, travel and group meetings that are prohibited by COVID-19
The order has a direct impact on the operations of an organization or business
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
Curfews that limit the hours of operation for certain businesses
Capacity limits that reduce the number of customers or clients that can be served by a business
Travel bans and restrictions that restrict the ability for a company to transport services or goods

To determine if a business was fully or partially suspended by a government order, an employer must consider:

The order’s nature, scope, and impact on the business
The duration and frequency of the order and how it coincides with the calendar quarters
The extent and severity of the impact of the order on the revenues and expenses of the business

Revenue Decline

It is considered that a business or organization has experienced a significant drop in gross receipts when:

The gross receipts for any calendar quarter in 2020 were less than 50% of its gross receipts for the same quarter in 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 consist of:

Sales of goods and Services
Rents, dividends, and annuities are examples of income streams that include interest, dividends.
Contributions, gifts and grants What Is The Cares Employee Retention Credit
Membership fees and dues
Gross revenue from businesses or trades

Employers must use the following formulas to calculate gross receipts and compare them between quarters.

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns for 2019.
It will use the same calendar year quarters for 2019/2021 as it did to file its federal Employment Tax Returns (Form 941).
The same sources of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A startup that is in recovery can be defined as

After February 15, 2020, you can start any business or trade.
Have average annual gross income of no more than $1 million over the three-year period ending the tax year before the calendar quarter in which the credit is 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. However, there are some limitations and special rules that apply to recovery startup businesses, such as:

The maximum credit amount per quarter is $50,000
The credit is only available for wages paid in the third and fourth quarters of 2021
Credits for recovery startups are subject to a maximum of $250 million.

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Credit Amounts Calculation

ERCs have different rules and amounts depending on the length of time and type of employer. The ERC is affected primarily by:

How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
How many employees an employer had in 2019, 2020/2021 or whether they worked, or did not work during the pandemic
The amount of money paid by the employer to each employee as well as their health insurance during 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 review the forms and pay the money back to the employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.

The ERC will not be available indefinitely. The ERC started in March 2020 and ends in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer should also make sure to not waste the money. What Is The Cares Employee Retention Credit

You can find more information below on ERC calculation and credit amount.

Time Period

The ERC has been introduced, modified, and terminated in different laws between 2020 and 2021. The amount of credit depends on the time frame for which it’s 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 of eligible employees will affect the calculation and definition of health insurance and qualified wages. 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. This table summarizes thresholds and rules to determine the size of an employer for each 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)

Earnings and Costs of Health Insurance

Qualified wages refer to wages paid during a period when the business is suspended or revenues are declining. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified earnings also include costs associated with providing health insurance coverage to eligible employees. These include premiums as well as deductibles.

The definition and calculation of qualified wages and health insurance costs depend on the employer size and the time period. The following table summarizes the rules and examples for different scenarios: What Is The Cares 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

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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 must report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.

Form 941

Form 941 is a quarterly tax return that the employer must file to show his federal tax liabilities. This includes income taxes, Medicare tax and Social Security taxes. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use Form 941 to:

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 What Is The Cares 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 newest version of the Form 941, which reflects changes to laws that impact the ERC.
Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
Use Line 11c for the amount of qualified wages and health benefits paid to eligible employees
Use Line 13d to declare the credit amount claimed for each quarter
Use Line 13f to report any advance payments of the credit received from the IRS
Line 24 is the place to ask for an advance payment if you need it.
Line 25 is the place to enter any excess credit which can be carried to a subsequent quarter.
Sign Form 941, date it and attach any documents or schedules that you wish to include.

The following are some resources and tips for filling in Form 941.

Use electronic filing services (efile) and online services to submit the Form 941 faster, more securely
Check the IRS website for updates, FAQs, and guidance on Form 941 and the ERC
If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

The Form 941 X is used for corrections and adjustments to a Form 941. Form 941-X also allows the employer to claim the ERC retroactively for past quarters. The employer can use Form 941-X to: What Is The Cares Employee Retention Credit

Claim a refund or credit for overpaid taxes due to claiming the ERC
Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
The amount of credit claimed will be affected by any mistakes or omissions in Form 941.

Employers can avoid common mistakes by filling in Form 941X correctly.

Use the latest version 941-X to reflect the updated laws and regulations that impact the ERC.
The IRS has provided worksheets to help you calculate the ERC.
Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
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 to report any additional amount of credit claimed for each quarter
Use Line 26 to report any refund or credit requested due to claiming the ERC
Sign and date the Form 941 X and add any supporting documents or schedules.

Tips and resources on how to complete Form 941 X include:

Fill out a separate form 941-X per quarter being corrected or recalculated What Is The Cares 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.
Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The last day to file Form 941 usually falls on the last month after the end of each quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by April 30, 2021. 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. After the end of the quarterly period. For example, for Q1 2021 (January-March), Form 941 is due by May 10, 2021, What Is The Cares Employee Retention Credit

The deadline for submitting Form 941X is usually three years following the original date of Form 941 or two after the date on which the tax was paid. For Q1 2020 (January – March), for example, Form 941 is due on April 30, 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 employee filed Form 941 April 30, 2020 and paid tax June 15, 2020 the deadline for submitting Form 941 X is June 15, 222.

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Conclusion

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 is a refundable tax credit that varies depending on the time period, the number of employees, and the amount of qualified wages and health insurance costs paid to eligible employees. The ERC 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.

This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. 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.

ERCs can be a huge help to your organization or business and its employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. This article aims to provide you with more information about the ERC. Stay safe and thank you for reading.

> > Click Here to Find Out if You are Eligible for ERC < <

What Is The Cares 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 created the American Rescue Plan Act of 2021 in March 2021. Later, the CAA (Consolidated Appropriations Act), in December 2020, was amended and expanded by ARPA (American Rescue Plan Act of 2021), in March 2021.

Can everyone apply for ERC?

ERC isn’t available to everyone. Employers who retained their employees and paid them wages between March 13, 2020, and December 31, 2021, are eligible.

More details are available above. But here are some of the highlights.

A government-issued order temporarily or permanently suspended the organization or business due to COVID-19.
The gross receipts of a calendar quarter for 2020 or 2021 were less than a percent of the gross receipts from a similar quarter in 2019.
You are a new business in recovery that has started operating after February 15th, 2020. Your average annual gross sales is no more than $1,000,000.

How much is ERC?

The amount of ERC an organization or business receives depends on several factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. To learn more about how ERCs are calculated, please read the 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 must declare the wages and costs of health insurance paid to employees who qualify and the credit claimed each quarter.

When is the Deadline for Filing the ERC Forms?

The deadlines for filing Forms 941 and 941-X are different.

Form 941 deadline is typically the last of the month following each quarter. While the deadline for the Form 941-X will be three years after you filled out the original Form 941. This can also be up to two years, based on the date when the tax is paid.