Who Is Eligible For Employee Retention Credit 2023?

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.

To help employers keep their employees, and to provide them with health insurance during these difficult times, the U.S. federal government has created the Employee Retention credit (ERC), an refundable tax credits that can offset some of payroll costs for employers who qualify.

The ERC, which was originally enacted in 2020 by the CARES Act, was extended and modified later by subsequent legislation in both 2021 & 2023. This article will provide an overview of the ERC and its workings, as well as how to apply for it in different time periods.

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? Who Is Eligible For Employee Retention Credit 2023?

The Employee Retention Credit (ERC) is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected 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 was created to encourage employers in crisis to keep workers on their payrolls and provide them health insurance.

Main Features and Advantages

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 credit limit and percentage are dependent on the period of time for which you claim the credit. For 2020, the percent is 50%, and the limit is $5,000 for each employee per year. For 2021, it is 70%. The limit is $7,000 per quarter per employee. 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. Who Is Eligible For Employee Retention Credit 2023?
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.
Employers who have experienced a significant drop in gross receipts or a complete or partial suspension of their operations as a result of a government order relating to COVID-19 can claim the credit. In addition, employers who qualify as recovery-startup businesses for 2023 can also claim the credits.
The credit can be claimed by filing an amended employment tax return (Form 941-X) or by reducing employment tax deposits in anticipation of the credit. Employers can also request an advance payment of the credit by filing Form 7200.

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Eligibility Criteria

To qualify for Employee Retention credit (ERC), employers must meet either of two main criteria.

A government order suspended the employer’s organization or business in full or part due to COVID-19 for a calendar quarter of 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.

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 qualify for the ERC regardless of business suspension or revenue decline.

Business Suspension

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

The order restricts commerce, travel or group meetings because of COVID-19
The order has an impact on the business or organization
The order applies to all calendar quarters in 2020 and 2021

Some examples of government orders that can cause a business suspension are:

Stay-at-home orders that restrict non-essential businesses from operating
Certain businesses are subject to curfews which limit their hours of operation
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 if the business was partially or fully suspended by an official order, employers must consider:

The nature and extent of the order, and its impact on the operation of your business
The duration, frequency of the orders and their alignment with the four quarters calendar.
The magnitude and impact of the order upon the revenue and expenses of a business

Revenue Decline

A significant decline in gross revenues is experienced by a business or organization if:

The gross revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 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 are:

Sales of goods and Services
Dividends (rents), royalties and interest
Contributions, gifts and grants Who Is Eligible For Employee Retention Credit 2023?
Membership fees and dues
Gross profit from business or trade

To calculate and compare gross revenue for different quarters using the following:

It should use the same method of accounting, either cash or accrual, that it used for its federal income tax returns 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 reported on your federal income tax form for 2019

Recovery Startup Business

A recovery startup is a business:

Began carrying on any trade or business after February 15, 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

If a business is in recovery, it can still qualify for ERC even if the business has been suspended or its revenue has declined. Recovery startup businesses are subject to certain restrictions and special rules.

The maximum credit 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

ERC amounts and rules vary for different time periods and employers. The ERC is primarily affected 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 the employer had in 2019 or 2020/2021, and whether they worked or not during the pandemic
How much did the employer pay each employee in health insurance?

In order to receive the ERC from the IRS, the employer will need to complete some forms. The form must show the amount the employer paid for their employees’ health insurance, and how they qualified 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 not be available indefinitely. The ERC began in March 2020, and it will end in September 2022. Employers must claim their ERC before they expire or become unavailable. The employer has to spend the money efficiently and not waste. Who Is Eligible For Employee Retention Credit 2023?

The following information provides more details on the ERC credit and how it is calculated.

Time Period

The ERC was implemented, amended, or terminated by various laws in 2020. The credit amount depends on the period for which you claim it. 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

The Number of Employees

The number affects the calculation of qualified wages for employees and their health insurance costs. A small employer or a large employer is determined by the number of employees who worked full-time (FTEs) in 2019 and the time period. The following table summarizes rules and thresholds to determine employer size.

Time Period	Small Employer Threshold	Large Employer Threshold
2020	Less than or equal to 100 FTEs in 2019	More than 100 FTEs in 2019
Q1-Q2 2021	Less than or equal to 500 FTEs in 2019	More than 500 FTEs in 2019
Q3-Q4 2021	Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.	More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.

To count FTEs for a given year or quarter, an employer must use the following steps:

Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
Divide the total hours by120and round down to the nearest whole number
Add the number of FTEs from Step One and Step Three for each month in the year or quarter
Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)

Qualified Wages and Health Insurance Costs

Qualified Wages are wages that eligible employees receive during periods of suspension or decline in revenue. Qualified wages can include severance payment, bonuses, severance tips, sick pay, family pay and other forms compensation. Qualified wages include health insurance costs for eligible employees such as co-pays and deductibles.

The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The table below summarizes rules and examples in different scenarios. Who Is Eligible For Employee Retention Credit 2023?

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 the Credit and Report It

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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.

Form 941

Form 941 is used to report the employer’s quarterly federal tax liability, including income tax, social security tax, and Medicare tax. The employer can also claim the ERC in Form 941 for future or current quarters. Form 941 allows the employer to do:

ERC reduces the amount that employers must deposit with the IRS in order to pay taxes.
If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Who Is Eligible For Employee Retention Credit 2023?
Carry forward any excess credits to future quarters

The employer 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 for the credit claim amount per quarter
Use Line 13f to report any advance payments of the credit received from the IRS
Use Line 24 to request a credit advance if necessary
You can report excess credit on Line 25 for the following quarters.
Sign and date Form 941, and include any supporting documents and schedules.

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
You can also contact a tax expert or the IRS for clarifications and assistance if you need it.

Form 941-X

Forms 941-X are used to rectify errors or make adjustments to Forms 941 previously submitted. The employer can also claim the ERC retroactively by using Form 941X. Employers can use Form 941/X for Who Is Eligible For Employee Retention Credit 2023?

Claim refunds or credits for taxes overpaid due to 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.
Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
Use Part 3 to explain why Form 941 is being corrected or adjusted
Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
Use Line 25 for any additional credit claimed each quarter.
Use Line 26 for any refunds or credits due to ERC claims.
Attach any supporting documents and schedules to Form 941-X.

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

Fill out a separate form 941-X per quarter being corrected or recalculated Who Is Eligible For Employee Retention Credit 2023?
After making a correction or finding an error, you should file Form 941X.
Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. 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. After the end quarter. For example, the Q1 of 2021 is January-March. The Form 941 should be received by May 10th, 2021. Who Is Eligible For Employee Retention Credit 2023?

The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For example, for Q1 2020 (January-March), Form 941 was due by April 30, 2020. If the employer has filed Forms 941 and paid tax by April 30th 2020, they have until April 30th 2023 to submit Form 941X. If an employer filed form 941 on April 30 2020 and paid the tax by June 15, 2020, then the deadline to file Form 941-X will be June 15, 2022.

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Conclusion

Employee Retention credit (ERC), a valuable benefit under tax law, can help employers who have been affected by COVID-19 keep their staff on payroll and minimize the impact of pandemic.

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 credit can be claimed with IRS Forms 941 or 941X by reporting to them the qualified health insurance and wages costs as well as the amount claimed each quarter.

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. It is important to file your forms quickly and correctly. This article provides tips and resources that will help you avoid common errors. If needed, you can also reach out to the IRS or a professional tax advisor for clarification or help.

The ERC is a great tool for both your business and employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. This article is intended to help you better understand the ERC, and how it can be claimed. Thanks for reading and please stay safe.

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Who Is Eligible For Employee Retention Credit 2023?

What is ERC and what does it do?

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).

Who is eligible for the 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 order suspended the business (fully or partly) because of the COVID-19 epidemic.
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.
They are a recovery startup business that began operations after February 15, 2020, and has average annual gross receipts of no more than $1 million.

What is the ERC rate?

The amount that an organization or company receives in ERC will depend on many factors.

Some of these include the time period and number of employees. Others are the amount paid in qualified wages or health insurance to eligible employees. The article above provides a detailed explanation on how ERC is calculated.

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 are required to report each quarter the total amount claimed as a credit and the wages and insurance premiums paid by eligible employees.

When is the deadline to submit the ERC form?

The deadline for filing the ERC forms is different for Form 941 and Form 941-X.

The last day to submit Form 941 for each quarter is the last calendar month. The deadline for Forms 941-X, however, is usually three years after the date the original Form was completed. It can be as late as two years after you paid the tax, but the later date is the preferred date.