The COVID-19 pandemic has caused unprecedented challenges and hardships for many businesses and organizations around the world. Many employers have faced reduced revenues, increased expenses, and disrupted operations due to lockdowns, social distancing, and health and safety measures.
To help employers retain their employees and provide them with health benefits during this difficult time, the U.S. government has introduced the Employee Retention Credit (ERC), a refundable tax credit that can offset some of the payroll costs for eligible employers.
The ERC has been in place since 2020 when the CARES Act was passed. Later, in 2021 and again in 2023, it was modified and extended by new legislation. This article will 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? Wondertrust Employee Retention Credit
Employee Retention Credit is a tax credit that can be refunded to businesses and tax-exempt organizations who had employees 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 a percentage of wages and health insurance premiums paid by eligible employees. There are limits per employee, per quarter.
- The percentage and the limit vary depending on the time period for which the credit is claimed. For 2020 the percentage is set at 50%, while the maximum per employee is set at $5,000. In 2021, 70% of the employees will be eligible for the maximum. The limit per employee is $7,000. 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. Wondertrust 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.
- Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
- Credits may be obtained by filing a revised employment tax form (Form 941X) or reducing employment deposit amounts in anticipation. By submitting Form 7020, employers can request an early payment of their credit.
To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:
- A government order has suspended or halted the business or organization of an employer due to COVID-19 in a calendar year 2020 or 2021.
- The gross receipts of the employer for a calendar-quarter in 2020 or 2020 were less than 50 percent (for 2020), or 80 percent (for 2021), of their gross receipts during the same calendar 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 will either fully or partially suspend an organization or business if:
- The order prohibits travel, group meetings, and commerce due to COVID-19
- The order impacts the operations of a business or organization
- Order applies to any calendar year in 2020 or 21
Some examples of government orders that can cause a business suspension are:
- Stay-at-home orders restricting non-essential business operations
- Curfews that limit the hours of operation for certain businesses
- Limits in capacity that restrict the number or clients that a business can serve
- Travel restrictions or travel bans that limit the ability of businesses to transport products or services
Employers must take into account the following to determine whether a business has been suspended in full or in part by an order of government:
- The nature and scope of the order and how it affects the operations of the business
- The duration, frequency of the orders and their alignment with the four quarters calendar.
- The 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 revenue for any calendar-quarter in 2020 was less than 50 percent of the gross revenues for the same period in 2019.
- The gross receipts from any calendar quarter during 2021 are less than 80% compared to the same quarter’s gross receipts from 2019.
Gross receipts are the total amount that a business or organization has received or accrued from all sources, during its annual accounting period. Gross receipts consist of:
- Sales of Goods & Services
- Dividends, rents, and royalties, as well as interest, are all examples of annuities.
- Contributions are gifts, donations and grants Wondertrust Employee Retention Credit
- Membership fees and dues
- Gross profit from business or trade
To calculate and compare gross receipts for different quarters, an employer must use:
- The same method of accounting (cash or accrual) that it used to file its federal income tax return for 2019
- 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 as reported in the federal tax return for 2019
Recovery Startup Business
Recovery startup businesses are those that:
- Began carrying on any trade or business after February 15, 2020,
- 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
It does not matter if a business meets the criteria of revenue decline or business suspension, a recovery-startup business qualifies for the ERC. Recovery startups are not exempt from certain rules and restrictions.
- The maximum credit per quarter will be $50,000
- The credit can only be used for wages paid between the third and the fourth quarters of 2020
- Credits for recovery startups are subject to a maximum of $250 million.
Credit Amounts and Calculation
There are different ERC rules and amounts for different employers and periods of time. The ERC’s main influences are:
- The employer’s business has been affected by the pandemic. This could be due to the government ordering the closure or reduction of operations or a significant drop in income from 2019.
- What number of employees did the employer have in 2019 and 2020/2021?
- How much each employee received from their employer and how they were covered by health insurance in the pandemic
To claim the ERC, the employer must fill out and submit a form 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 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 is not available forever. The ERC began in March 2020, and it will end in September 2022. The employer must claim ERC before the expiration date or when it becomes unavailable. The employer must also spend the money properly and not waste any of it. Wondertrust 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 credit depends on the time frame for which it’s 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 affects the calculation of qualified wages for employees and their health insurance costs. The size of an employer depends on its number of FTEs and the time period. 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)
Qualified Wages and Health Insurance Costs
Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. Qualified wages include tips, commissions, bonuses, severance pay, sick leave pay, family leave pay, and other forms of compensation. Qualified wage also includes the cost of health insurance for eligible employees. This may include premiums, deductibles, co-pays, or co-insurance.
The calculation of qualified wages, health insurance costs and employer size depends on the time period. Table 1 summarizes and gives examples of rules in various scenarios. Wondertrust Employee Retention Credit
|Employer Size||Time Period||Qualified Wages and Health Insurance Costs||Example|
|Small||2020||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.|
|Small||Q1-Q3 2021||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.|
|Small||Q3-Q4 2021 (Recovery Startup Business)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)||A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.|
|Small||Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not||An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.|
|Large||2020||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)||An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).|
|Large||Q1-Q3 2021||Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)||An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).|
|Large||Q3-Q4 2021 (Severely Financially Distressed Employer)||All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)||An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs|
Claim the Credit and Report It
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 has to report each quarter the wages and costs of health insurance paid to employees who are eligible and the credit claimed.
Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. Form 941 allows employers to claim ERCs for current or future quarterly periods. Form 941 can be used by the employer to:
- ERCs can be used to reduce the amount of tax that an employer must pay to the IRS.
- The employer can request an advanced payment of the ERC credit if it exceeds taxes that they have to deposit. Wondertrust Employee Retention Credit
- Carry forward any excess credits to future quarters
To avoid making common errors and fill out Form 941 correctly, employers should:
- Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
- Follow the instructions and worksheets provided by the IRS for calculating and reporting the ERC
- Use line 11c to report qualified wages paid and health insurance premiums paid to eligible employees
- Use Line 13d to declare the credit amount claimed for each quarter
- Line 13f should be used to report any advance payments made by 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 and date Form 941, and include any supporting documents and schedules.
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
- You can find updates, FAQs, and more information on the IRS site about Form 941, the ERC.
- You can also contact a tax expert or the IRS for clarifications and assistance if you need it.
Form 941-X is used to correct errors or make adjustments on a previously filed Form 941. Form 941-X allows employers to claim ERC retroactively. The employer can use the Form 941 X to: Wondertrust Employee Retention Credit
- Claim the ERC to get a refund of taxes that you have overpaid.
- Report additional qualified wage and health insurance expenses paid to eligible employees which were not reported in Form 941
- You can correct any errors or omissions that may have affected the credit claimed amount on Form 941.
To fill out Form 941-X correctly and avoid common errors, the employer should:
- Use the latest form 941X that reflects changes to laws that are applicable to the ERC.
- The IRS has provided worksheets to help you calculate the ERC.
- Use Part 2 to indicate the lines on Form 941 that are being corrected or adapted.
- Use Part 3 of Form 941 to explain why it is being amended or corrected
- Use Line 24 to declare any additional qualified wages or health insurance costs paid by eligible employees.
- 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 and date Form 941-X and attach any supporting documents or schedules
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 Wondertrust Employee Retention Credit
- If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
- The IRS website has updated FAQs on the ERC, Form 941 X, and updates to the IRS website.
- If you need clarification or assistance, contact the IRS or an accountant.
Deadline and Statute of Limitations
The deadline to submit Form 941 is usually the last day in the month following each quarter. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. However, if an employer made timely deposits of all taxes due for a quarter, it can file Form 941 by the 10th day of the second month. After the end of the quarterly period. Form 941 for the first quarter of 2021 (January – March) is due on May 10, 2021. Wondertrust Employee Retention Credit
The deadline for filing Form 941-X is generally three years from the date that the original Form 941 was filed or two years from the date that the tax was paid, whichever is later. For Q1 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 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.
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. It varies based on time, number of employees, and amount of wages and health insurance 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.
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 does not last forever. It has a deadline, and there is a statute of limitations for claiming the ERC. You should file your forms as soon as possible and use the tips and resources provided in this article to fill them out correctly and avoid common errors. For clarifications or help, you can always contact an IRS agent or tax professional.
ERC can have a significant impact on your business, organization, and your employees. It can be used to help retain your employees, maintain your cash flow, and recover in the event of a pandemic. We hope that this article helped you to understand more about ERC and the claim process. Thanks for reading and please stay safe.
Wondertrust Employee Retention Credit
What is the ERC?
The Employee Retention Credit is a tax credit for employers who retained their employees in their payroll 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).
Does everyone qualify for the ERC program?
The ERC is not available to everyone. Only employers who paid wages and retained employees between March 13, 2019, and December 31, 2020, are eligible.
You can read more about the criteria here. Here are some highlights.
- A government order has suspended the business or organization (wholly or partially) due to COVID-19.
- The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
- 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 does the ERC cost?
The amount of ERC that a company will receive depends on a number of factors.
Some of these factors include the time period, the number of employees, the number of qualified wages, and health insurance costs paid to eligible employees. You can read the article above for a more detailed explanation of how ERC is calculated.
How to claim ERC
To receive the ERC, employers must file with the IRS a Form 941-X (revised employment tax returns) or a Federal Employment Tax Reform.
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 submit the ERC form?
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. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.