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 was first enacted by the CARES Act in 2020 and was later extended and modified by subsequent legislation 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? When Did The Employee Retention Credit Start
Employee Retention Credit (ERC) is a refundable credit available to tax-exempt and for-profit organizations and businesses that have employees who were affected by COVID-19. 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 encourages employers to maintain their workers and to provide health benefits to them during the crisis.
The Main Features and Benefits
- Credit is a fixed percentage of qualifying wages and health care costs paid by employers to employees.
- The percentage and limit will vary depending on when the credit is claimed. For 2020, the percentage is 50%, and the limit is $5,000 per employee for the entire year. For 2021, the percentage will be 70%, and the limit per quarter is $7,000 for each employee. For 2023, there will be a 70 percent percentage for the initial two quarters of the year and a 40 percent percentage for the last two. There will also be a limit of $10,000 per employee each quarter. When Did The Employee Retention Credit Start
- 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. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
- Credits can be claimed either by amending your employment tax return (Form 941)-X or by reducing your employment tax deposit in anticipation of receiving the credit. Employers may also request an advanced payment of the credit using Form 7200.
In order to qualify for Employee Recruitment Credit (ERC), a company must meet the following criteria:
- The employer’s business or organization was fully or partially suspended by a government order due to COVID-19 during a calendar quarter in 2020 or 2021
- 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 are eligible for the ERC, regardless of whether their business has been suspended or if revenue has declined.
A government order may suspend a business, or even partially suspend it.
- The order limits travel, commerce or group meetings as a result of COVID-19
- The order will affect the operation of the business or the organization
- The order applies to any calendar quarter in 2020 or 2021
These are some examples:
- Stay-athome orders restrict non-essential enterprises from operating
- Certain businesses have curfews that limit their hours of operations
- Limits on the capacity of a business that limit how many customers or clients it can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
To determine whether an employer’s business was suspended fully or partially by a government directive, the employer must:
- The scope and nature of the order as well as how it impacts the business.
- The order’s duration, frequency, and alignment with the calendar quarters
- The extent and severity of the impact of the order on the revenues and expenses of the business
It is considered a significant decrease in gross revenue if a business has:
- The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 2019.
- The gross revenue for any quarter of 2021 was less than 80% that for the same period 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 & Services
- Dividends (rents), royalties and interest
- Gifts, donations, and contributions When Did The Employee Retention Credit Start
- Membership fees and dues
- Gross income from trades or businesses
Employers must use the following formulas to calculate gross receipts and compare them between quarters.
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- The same quarters in the calendar year as those used for the federal employment tax returns (Form 941) filed by 2019 and 2020/2021
- 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.
- The average annual gross receipts for the three tax years ending in the year preceding the quarter for which credit is calculated cannot exceed $1 million
A recovery startup business can qualify for the ERC regardless of whether it meets the criteria of business suspension or revenue decline. Recovery startup businesses are subject to certain restrictions and special rules.
- The maximum amount of credit 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 Amount and Calculation
The ERC has different rules and amounts for different periods of time and different types of employers. 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
- Employer’s number of employees in 2019 or 2021, and whether the employee worked or not.
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
Employers must complete and send IRS forms to claim 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 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. The ERC will expire in September 2022. The employer is required to claim ERCs before they expire, or are no longer available. The employer has to spend the money efficiently and not waste. When Did The Employee Retention Credit Start
You can find more information below on ERC calculation and credit amount.
Different laws introduced, amended and terminated the ERC in 2020, 2021 and 2022. The credit amount varies depending on the time period for which it is claimed. 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 of employees affects the definition and calculation of qualified wages and health insurance costs for eligible employees. The size of an employer depends on its number of FTEs and the time period. The table below summarizes all the rules and thresholds that determine an employer’s size.
|Time Period||Small Employer Threshold||Large Employer Threshold|
|2020||Less than or equal to 100 FTEs in 2019||More than 100 FTEs in 2019|
|Q1-Q2 2021||Less than or equal to 500 FTEs in 2019||More than 500 FTEs in 2019|
|Q3-Q4 2021||Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.||More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.|
To count FTEs for a given year or quarter, an employer must use the following steps:
- Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
- Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
- Divide the total hours by120and round down to the nearest whole number
- Add the number of FTEs from Step One and Step Three for each month in the year or quarter
- Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)
Qualified Wages & Health Insurance Costs
Qualified wages are wages paid to eligible employees during a period of business suspension or revenue decline. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.
The size of an employer’s business and the period in which they operate will determine the definition and calculation for qualified wages and health care costs. This table summarises the rules and provides examples for various scenarios. When Did The Employee Retention Credit Start
|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 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 report the qualified wages and health insurance costs paid to eligible employees and the amount of credit claimed for each quarter.
Form 941 allows employers to declare their quarterly federal taxes, including income taxes, Medicare and Social Security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. Form 941 is used by employers to:
- ERC – Reduce the amount the employer is required to pay in taxes.
- Employers can request a payment in advance if their ERC is higher than the taxes they are required to pay. When Did The Employee Retention Credit Start
- Carry over any excess credit into the following quarter
To ensure the correct completion of Form 941, and to avoid common errors:
- Use the latest version of Form 941 that reflects the changes and updates made by the laws that affect the ERC
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- 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
- Use Line 13f to declare any advance payments received from the IRS.
- Line 24 is the place to ask for an advance payment if you need it.
- Use Line 25 to report any excess credit that can be carried forward to subsequent quarters
- Sign the form 941, and attach any supporting documents.
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
- Updates, FAQs, and guidance about Form 941, the ERC, and other IRS forms can be found on the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. Form 941 X also allows for the employer to claim ERC retroactively. The employer can use Form 941-X to: When Did The Employee Retention Credit Start
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wages and health insurance costs paid to eligible employees that were not reported on Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To avoid making common errors and fill out the Form 941-X correctly, employers should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- For calculating and reporting your ERC, follow the IRS’s instructions and worksheets.
- Use the Part 2 to indicate on which lines you are correcting or adjusting Form 941
- Use Part 3 for explaining why form 941 has been corrected or adjusted
- Line 24 is used to report additional wages and health insurance premiums paid to eligible employees.
- Line 25 is the place to enter any additional credit claims for each quarter.
- Use Line 26 to report any credit or refund due to the ERC claim.
- Attach any supporting documents and schedules to Form 941-X.
Here are some tips and resources to help you fill out Form 941X:
- Filter a separate Form 941/X for every quarter that needs to be corrected or adjusted When Did The Employee Retention Credit Start
- After making a correction or finding an error, you should file Form 941X.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- 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 Q1 2021 (January-March), the Form 941 must be filed by April 30th, 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. When Did The Employee Retention Credit Start
The deadline to file Form 941-X generally is three years after the date the original Form 941 is filed, or two years after the date the tax is paid. For example, for Q1 2020 (January-March), Form 941 was due by 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 filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.
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 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. 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.
Do not miss out on this opportunity if you’re an employer that meets the ERC eligibility criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. The forms should be filed as soon as you can. You can use the resources and advice provided in this post to avoid common mistakes and fill them out correctly. If you need clarification or assistance, you can contact the IRS.
ERC can have a significant impact on your business, organization, and your employees. It can help your business or organization retain workers, maintain cash flow and recover from a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. Thank you for reading, and stay safe.
When Did The Employee Retention Credit Start
What is ERC and what does it do?
Employee Retention Credit is an employer tax credit available to employers who kept their employees on payroll during COVID-19.
The CARES Act, passed by Congress in March of this year, was amended in December of that year by the CAA Act. In March 2021, the ARPA Act (American Rescue Plan Act of 2021), was extended.
Does everyone qualify for the ERC program?
ERCs are not available to all. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
There are also criteria for eligibility; more details can be read above, but here are the highlights:
- The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
- 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.
- 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 the ERC?
The amount of ERC an organization or business receives depends on 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 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.
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 to file the ERC Forms
The deadlines of Form 941, Form 941X and ERC 941 are different.
Form 941 deadline is typically the last of the month following each quarter. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It can also be from two years from the date that the tax was paid, with the later date being the more preferred one.