COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to employees during the pandemic.The ERC is intended to keep employees employed, even when businesses are unable operate normally.
The ERC is a great way to keep your employees engaged and your business running smoothly if you’re a business owner impacted by the pandemic.To learn more about the ERC and how to claim it, visit the IRS website, speak with a tax advisor, or read below
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.
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The Employee Retention Credit941 Employee Retention Credit
Employee Retention credit (ERC), a refundable income tax credit, is available to businesses for wages paid by them during the COVID-19 epidemic.It was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 to help businesses keep their employees on the payroll, even if they were unable to operate normally.
ERCs are available to all businesses, even tax-exempt ones.To be eligible, a business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to a COVID-19-related government order.
The ERC is able to provide significant financial support for businesses affected by the pandemic.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC created
The COVID-19 pandemic triggered a severe economic recession, forcing many companies to layoff their employees or close down.The ERC was created to help businesses keep their employees on payroll so that they could quickly reopen and resume normal operations once the pandemic subsided.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.Businesses may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. 941 Employee Retention Credit
The Impact of the ERC in the Business and Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It also helped companies to weather the economic storm and remain afloat.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
The test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.In order to qualify for the 2020 ERC, businesses must have had a substantial decline in gross revenues of at least half compared with the same quarter last year.In 2021, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
Two ways exist for businesses to qualify for the ERC:
- ERC for a business suspended fully or partly by a Government Order: An ERC can be awarded to a business that is suspended either completely or partially by an order of the government due COVID-19.The ERC is available to businesses that have been told to close or operate at reduced capacity.
- Significant decline in Gross Receipts: An eligible business who has suffered a significant decrease in gross receipts as a result of COVID-19 may also be eligible for ERC.Significant declines in revenue are defined as a decrease of at minimum 50% in 2020 quarters or at most 20% in 2021 quarters compared to same quarters the year before.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
A government order can suspend a person’s rights in full or part
- ERC may be available for a restaurant that has to close because of a government directive.
- ERC eligibility is granted to a gym that must operate at a lower capacity as a result of a government order relating to COVID-19.
Significant decline in gross receipts:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- ERC can be awarded to a manufacturer who cannot operate at full capability due to disruptions to the supply chain.
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Credit Amount
Employee Retention Tax Credit (ERC), is a credit for businesses that can be claimed on qualified wages paid by employers to their employees during COVID-19.The credit amount varies according to the quarter and number of employees of a business.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.This could mean that an employer can get a credit up to $5,000 for 2020.
For the three first quarters of the year 2021, the credit is equal to 70% of the wages qualified to be paid. There is a limit of $10,000 per employee per quarter.For the first three-quarters of 2021, a business can receive up to $7,000 in credit per employee. This could amount to up to $21,000 for each employee.
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Claim the Credit
How to Claim ERC in Federal Employment Taxreturn
For businesses to claim Employee Retention Credit on federal employment taxes, they must amend Form 941X – Adjusted Employer’s quarterly Federal Tax Return (or Claim for refund) – in order to do so, they will need to file Form 941X.This form can be filed for any quarter in which the business was eligible for the credit.
Options for Claiming the ERC in Advance
Businesses have three choices for claiming ERCs:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.To do this, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- Request a refund: Businesses that have already paid their employment taxes can request a refund of the credit by filing Form 941-X with the IRS.
Calculating the Credit Amount and Avoiding Double-dipping with Other Relief Programs
Multiplying employee wages with the applicable credit rate will give you the ERC.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.For example businesses cannot claim ERC for wages used to claim Paid Family and medical leave credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Keep detailed records for all wages that were paid to employees in the ERC period.This will enable businesses to accurately determine the amount of credit that they are eligible for, and to back up their claim should it be audited. 941 Employee Retention Credit
Here are some helpful tips on documenting your records and documents:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of every employee’s hours, including sick time, holiday, and vacation.
- Track all employee wages, including bonuses, overtime, and base pay.
- Keep track of all government orders that affect your business.
The IRS provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
The Employee Retention Credit (ERC) is available to businesses that have been impacted by the COVID-19 pandemic.Here are some businesses that could be eligible for Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail stores that saw a significant fall in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and other hospitality businesses
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms, fitness studios
- Salons and spas
- Retail stores selling non-essential goods
- Businesses that had to operate on a lower capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses who experienced higher costs due to COVID-19
In addition to these examples, any business that was fully or partially suspended by a government order or that experienced a significant decline in gross receipts due to COVID-19 may be eligible for the ERC. 941 Employee Retention Credit
Here are some examples that show how businesses have used ERCs:
- A restaurant that was forced to close for several months due to a government order was able to use the ERC to keep its employees on the payroll.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- A manufacturer that was unable to operate at full capacity due to supply chain disruptions was able to use the ERC to keep its employees on payroll and continue to produce essential goods.
- A nonprofit organization that saw its donations decline due to COVID-19 was able to use the ERC to keep its employees on payroll and continue to provide essential services.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (ERC).These scammers may use aggressive marketing tactics to try to convince businesses to sign up for their services, even if the business is not eligible for the ERC.
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- The company promises to give you a full refund without reviewing any of your records.
- They charge high upfront fees or a percentage of your refund.
- High-pressure sales tactics are used. 941 Employee Retention Credit
- They are not members of a reputable professional tax organization.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
You should contact the IRS if you receive a call from an ERC scammer.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting personal information and financial data is equally important.Never give out personal information to someone who contacts you without your permission.If you have any doubts about the legitimacy of a business, you can look at their online reviews or ask for help from the IRS.
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Conclusion
In this article, we have discussed the Employee Retention Credit (ERC), a tax relief program that helps eligible employers keep their employees on payroll during the COVID-19 pandemic.We have discussed eligibility requirements, claiming processes, and possible scams related the ERC.
Also, we have provided some resources and tips for documenting and keeping records.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and support their workforce.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Employee Retention Bonus Frequently Answered Questions
941 Employee Retention Credit
What is ERC?
This is a tax credit that can be refunded to businesses who were affected by the COVID-19 Pandemic.
This credit is equal to 50% the wages paid by employees to qualified employees in 2020. And 70% of the wages paid by employees to qualified employees in their first three quarters in 2021.
Who is eligible to apply for ERC?
Eligible business for the ERC includes those who suffered a significant reduction in gross receipts due to government order caused by COVID-19.
What is a qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I need to repay the ERC?
The ERC does not require repayment by businesses. It is a tax credit that can be used to offset future taxes.
Can I claim ERC if I received a loan from PPP?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self employed individuals claim ERC benefits?
Self-employed individuals can apply for the ERC.
Self-employed individuals can claim the ERC on their Schedule C form.
Can non-profit organizations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies with a foreign subsidiary claim ERC?
Yes, employers can claim ERC when they pay wages to foreign employees.
That said, there are some additional requirements that must be met before they can claim it.
Are there common mistakes that businesses make when claiming ERC to watch out for?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Wrong calculation on credit
- Include all wages that qualify
- Failure to amend Forms 901-X by deadline