COVID-19’s pandemic caused unimaginable hardships to many organizations and businesses around the globe. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.
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 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. 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? What Is The Deadline To File For The 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 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 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. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, there is a 70% percentage and a limit of $7,000 per employee per quarter. For 2023, there is a 70% percentage for the first 2 quarters followed by 40% for the second two quarters. There is a $10,000 limit per employee. What Is The Deadline To File For The Employee Retention Credit
- The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
- The credit can be claimed by employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a qualifying government order related to COVID-19. Employers who are considered to be recovery startup businesses may also claim this credit, but only for 2023.
- Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can request an advance payment by submitting Form 7200.
Criteria for Eligibility
To qualify for the Employee Retention Credit (ERC), an employer must meet one of the following 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.
- The employer’s gross revenues for a quarterly calendar period in 2020, 2021 or both were less that 50% (for the 2020 quarter) or 80% (2021 quarter) of its gross revenue for the same year-ago quarter.
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 can be eligible for ERC regardless of their revenue decline or 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 will affect the operation of the business or the 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:
- Orders to stay at home that prevent non-essential companies from operating
- Curfews that limit the hours of operation for certain businesses
- Capacity limitations that reduce the amount of customers or clientele that a firm can service
- Travel bans or restrictions that affect the ability of a business to transport goods or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The nature and scope of the order and how it affects the operations of the business
- The order’s duration, frequency, and alignment with the calendar quarters
- The impact of an order on revenue and expenses
A significant decline in gross revenues is experienced by a business or organization if:
- The gross receipts in any calendar quarter of 2020 will be less than 50% the gross receipts in the same quarter of 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period in 2019.
Gross receipts are the total sums that an organization or a business has accrued or received from all its sources in a given accounting year, without any deductions. Gross receipts include the following:
- Sales of goods and Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions, gifts, grants, and donations What Is The Deadline To File For The Employee Retention Credit
- Membership fees and dues
- Gross income from trades or businesses
To calculate and compare gross revenue for different quarters using the following:
- Use the same method (cash or accrual accounting) as it used when filing its federal income taxes 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).
- It is the same income sources that were reported on the federal income tax returns 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.
- 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
The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.
- 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
- The maximum credit available for startup businesses is $250 million.
Credit Amount and Calculation
ERC amounts and rules vary for different time periods and employers. The ERC’s main influences are:
- How much of the employer’s income was affected in 2019 by the pandemic.
- 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
The employer has to fill out some forms and send them to the IRS to claim the ERC. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will review the forms and pay the money back to the 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 is not available forever. The ERC will expire in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer should also make sure to not waste the money. What Is The Deadline To File For The 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 amount of the credit varies according to the time period that it is applied for. The table below summarizes key differences and features of the ERCs for each time period:
|Time Period||Law||Eligible Employers||Credit Rate||Qualified Wages|
|2020||CARES Act||Employers with business suspension or revenue decline of more than 50%||50% of qualified wages up to $10,000 per employee per year||Wages paid from March 13 to December 31, 2020|
|Q1-Q3 2021||CAA and ARPA||Employers with business suspension or revenue decline of more than 20%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from January 1 to September 30, 2021|
|Q3-Q4 2021 (Recovery Startup Business)||ARPA||Recovery startup businesses with average annual gross receipts of no more than $1 million,||70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),||Wages paid from July 1 to December 31, 2021,|
|Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||ARPA and IIJA||Employers with a revenue decline of more than 90%||70% of qualified wages up to $10,000 per employee per quarter||Wages paid from October 1, 2021, to September 30, 2022|
Number of Employees
The number and type of employees can affect the definition and calculation for qualified wages and health care costs. The size of an employer depends on its number of FTEs and the time period. The following table summarizes the thresholds and rules for determining the employer size for 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 and Health Insurance Costs
Qualified wages include wages paid to eligible workers during a business suspension or revenue decrease. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms 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 table below summarizes rules and examples in different scenarios. What Is The Deadline To File For The 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 is required to report the qualified wages, health insurance costs and credit claimed by each quarter.
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 allows the employer also to claim ERCs in current or future quarters. Form 941 can be used by the employer to:
- ERC reduces taxes that employers have to deposit at the IRS.
- You can ask for advance payment if your ERC exceeds the amount of taxes you have to pay. What Is The Deadline To File For The Employee Retention Credit
- Carry over any excess credit into the following quarter
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the most recent version of Form 941, which reflects any changes or updates to the ERC laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
- Use Line 13d for the credit claim amount per quarter
- Line 13f is used to report any advance payment of credit received by the IRS
- Use Line 24 if you require an advance credit payment.
- Use Line 25 to report any credit excess that can be carried over to the next quarter.
- Sign Form 941, date it and attach any documents or schedules that you wish to include.
Tips and resources on how to complete Form 941 include:
- 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
- Need clarification? Contact an IRS agent or tax professional.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. The Form 941X allows the employer retroactively to claim ERC for previous quarters. The employer can use Form 941-X to: What Is The Deadline To File For The Employee Retention Credit
- Claim a refund or credit for overpaid taxes due to claiming the 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.
The employer should:
- Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
- Follow the IRS instructions and worksheets for calculating the ERC and reporting it.
- Use Part 2 of Form 941 to indicate which lines are being amended or corrected.
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
- Use Line 25 to claim any additional credit for 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.
Here are some tips and resources to help you fill out Form 941X:
- For each quarter to be adjusted or corrected, you must submit a different Form 941X. What Is The Deadline To File For The Employee Retention Credit
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
- Need clarification? Contact an IRS agent or tax professional.
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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. Following the end of the quarter. For Q1 2021 (January-March), form 941 must be submitted by May 10, 2020, What Is The Deadline To File For The Employee Retention Credit
The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employer filed Form 941 on April 30, 2020, and paid the tax on April 30, 2020, the deadline for filing Form 941-X is 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 Credit is a valuable tax credit that can assist employers affected by the COVID-19 Pandemic to keep their employees and reduce the impact on their business or organization.
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 is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.
If you are an employer who meets the eligibility criteria for the ERC, you should not miss this opportunity to take advantage of this tax benefit. The ERC will not be available indefinitely, and it has a set deadline and statute of limitations. To avoid making common mistakes, you should fill out the forms correctly using the information and tips in this article. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.
ERCs can be a huge help to your organization or business and its employees. It can help you retain your workers, maintain your cash flow, and recover from the pandemic. This article should have helped you learn more about ERCs and how to apply for them. Thank you for reading. Stay safe.
What Is The Deadline To File For The Employee Retention Credit
What is the ERC?
Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.
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).
Can everyone apply for ERC?
The ERC is not available to everyone. Employers only eligible for the ERC are those who have retained and paid wages to their employees between March 14, 2020 and Dec 31, 2021.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- Their gross revenues for a quarter calendar in 2020 or in 2021 were lower than a percentage compared to their gross revenues for the same period in 2019.
- The business is a startup that started operations after February 15, 2020, and has an average gross revenue of less than $1 million.
How much is ERC?
The amount of ERC a company or organization receives will depend on several factors.
Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. For a detailed explanation of ERC, you can read the article mentioned above.
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 deadline for filing the ERC forms is different for Form 941 and Form 941-X.
The deadline for Form 941 is usually the last day in the month after the end of every quarter. Meanwhile, the deadline for Form 941-X is generally three years from the date that the original Form 941 was filled. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.