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 allows businesses to claim a tax credit on wages paid during a pandemic.The ERC was created to ensure that businesses can continue to pay employees during a pandemic, even if their normal business operations are disrupted.
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.Visit the IRS website to learn more about ERCs and how you can claim them. You can also speak with a tax adviser or read the following.
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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Employee Retention CreditAccounting For Employee Retention Credit – Kpmg
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages during the COVID-19 Pandemic.It was created in March of 2020 by the Coronavirus Aid, Relief, and Economic Security Act to help employers keep their workers on the payroll, despite the fact that they may not have been able to operate normally.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.To qualify, the business must have seen a significant reduction in gross sales or be suspended fully or partly due to an order from the government related to COVID-19.
The ERC is able to provide significant financial support for businesses affected by the pandemic.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was the ERC created?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.The ERC is designed to help keep businesses open and their employees working so that they can resume normal operations as soon as the pandemic subsides.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can also be used to retain staff, which is important for a swift recovery.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.Businesses can claim the ERC on wages paid to employees that are not working because of COVID-19. This includes employees who have been furloughed, quarantined, or are otherwise not allowed to work. Accounting For Employee Retention Credit – Kpmg
Impact of ERCs on the Economy and Businesses
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.The ERC has helped many businesses stay afloat during the COVID-19 pandemic.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.In 2020, the business must have seen a decline of gross receipts by at least 50% in comparison to the same quarter the year before.In 2021, the business must have suffered from a significant fall in gross sales of at least 20% when compared to same quarter in previous year.
Business Qualifications
Business can qualify in two ways for the ERC
- Fully or partially suspended by a government order: A business that has been fully or partially suspended by a government order due to COVID-19 is eligible for the ERC.This includes businesses who have been ordered closed, to operate at a lower capacity, or to follow certain restrictions.
- Significant decline in gross receipts: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.Significant decline in Gross Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
Examples and Scenarios
The following are some scenarios and examples that will help you understand each eligibility criteria.
A government order can suspend a person’s rights in full or part
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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 can be awarded to a retail store that has experienced a 50% decrease in sales because of COVID-19.
- ERCs are available for manufacturers that cannot operate at their full capacity as a result of disruptions in supply chains.
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Credit Amount
Employee Retention Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The amount of credit depends on the number of employees and the quarter.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.This means that a business could receive a credit of up to $5,000 per employee 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 3 quarters in 2021, an employer could receive up to $7,000 per employee each quarter. That’s up $21,000 per worker for the whole year.
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Claim the Credit
How to Claim ERC in Federal Employment Taxreturn
To claim the Employee-Retention Credit (ERC), businesses must file a Form 941-941-X, Adjusted Employer Quarterly Federal Tax return or Claim of Refund.This form can be filed for any quarter in which the business was eligible for the credit.
Options for Claiming the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim the credit in advance: Businesses can claim the credit in advance by reducing their quarterly employment tax deposits.To do this, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- Businesses that already pay their employment taxes to the IRS can request a reimbursement of the credit. To do this, they must file Form 941X.
Calculating the Credit Amount and Avoiding Double Dipping with Other Relief Programs
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
Businesses should be aware of the dangers of double-dipping.For example, businesses can’t claim the ERC if they are also claiming the Paid Family Leave Credit or Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should keep detailed records of all qualified wages paid to employees during the ERC period.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Accounting For Employee Retention Credit – Kpmg
Here are some tips on recordkeeping and documentation.
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Track all employee wages, including bonuses, overtime, and base pay.
- Keep track of all government orders that affect your business.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can contact IRS for help by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses that have been affected by the COVID-19 Pandemic can apply for the Employee Retention Credit.These are some examples of businesses who may qualify for the Employee Retention Credit.
- Government orders force restaurants to close
- Retail stores that experienced a significant decline in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality business
- Travel and Tourism Businesses
- Entertainment and event business
- Personal care businesses
- Fitness studios and gyms
- Salons, spas
- Retail stores that sell non-essential products
- Businesses required to operate under reduced capacity
- Businesses that are forced to implement new safety protocols
- Costs increased for businesses due to COVID-19
ERCs may be awarded to any business, including those that were fully or partially closed by a government order and/or experienced a significant decrease in gross receipts because of COVID-19. Accounting For Employee Retention Credit – Kpmg
Here are some examples of how companies have used the ERC in specific situations:
- A restaurant that had to close its doors for several weeks due to government orders was able, with the ERC, to keep all of its employees employed.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- ERC can be used by a producer who is unable operate at maximum capacity due to disruptions of the supply chain. This allows them to keep their employees and continue producing essential products.
- 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.
You should contact a professional tax advisor if, as a small business owner, you have any doubts about your eligibility for the ERC.You can get help from a tax professional to determine your eligibility for the ERC and claim it if eligible.
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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 can use aggressive marketing strategies to convince companies to sign-up for their services even when they are not eligible to receive the ERC.
Red Flags and Warning Signs
There are warning signs that could indicate an ERC scammer.
- They guarantee to refund your money without looking into your records.
- They charge you high upfront fees or a certain percentage of your refund.
- High-pressure sales tactics are used. Accounting For Employee Retention Credit – Kpmg
- They are not affiliated to a reputable organization of tax professionals.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting your financial and personal information is also important.You should not provide your personal information to anyone contacting you uninvited.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
We have covered the Employees Retention (ERC) Credit in this article. This is a tax credit program that helps employers who qualify to retain their staff during the COVID-19 pandemic.We have discussed the ERC eligibility requirements, claim process and potential scams.
We also have some tips and materials for documenting your records.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support their employees.If you are an eligible employer, we encourage you to claim the credit and seek professional assistance if needed.
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Employee Retention Bonus Frequently Answered Questions
Accounting For Employee Retention Credit – Kpmg
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
This credit is equal to 50% of qualified wages paid to employees in 2020 and 70% of qualified wages paid to employees in the first three quarters of 2021.
Who is eligible to apply for ERC?
Eligible companies for the ERC are those businesses that experienced a significant fall in gross sales or were partially or completely suspended because of government orders triggered by the COVID-19 outbreak.
What is a qualified wage?
Included in qualifying wages are wages, salaries, and tips paid to employees.
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 have to pay back 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, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed people claim the ERC?
Yes, self-employed individuals are eligible 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 may claim the ERC by submitting Form 990-T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Businesses can claim ERC for the wages they pay to foreign-based employees.
That said, there are some additional requirements that must be met before they can claim it.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
When claiming your ERC; businesses must be aware of the following mistakes:
- Wrong calculation on credit
- Inclusion of all eligible wages
- The failure to amend Form 941-X in time.