COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of 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 can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay afloat.For more information on the ERC and how to apply for it, you can visit the IRS site, talk with a professional 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 CreditAmending 941 For 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 can be obtained by businesses of any size, including those exempt from tax.A business must be eligible if it has experienced a significant drop in gross receipts, or if they have been suspended or fully suspended because of a COVID-19 related government order.
The ERC can provide a significant financial boost to businesses that have been impacted 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 caused an economic downturn that forced many businesses either to layoff employees or shut their doors.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
The ERC is a great way to boost the finances of businesses affected by pandemics.The ERC can help businesses retain employees, which is crucial for a rapid recovery.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.Businesses may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. Amending 941 For Employee Retention Credit
Impact of the ERC on Businesses and the Economy
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.The ERC also helped to keep businesses afloat through the economic storm.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.It has also contributed to the economic recovery by boosting consumer spending and investment.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.In 2020, an enterprise must have suffered a significant drop in gross receipts that is at least 50 percent less than the same period in the previous calendar year.In 2021, an organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
Business Qualifications
Businesses can qualify for the ERC in two ways:
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- Significant decline in gross revenues: Businesses that have experienced a significant drop in gross revenue due to COVID-19 are also eligible for ERC.Significant declines in gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Examples and Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
An order of the government may suspend all or part of a program.
- ERC will cover a restaurant which is forced to close down by government orders.
- A gym that is required to operate at a reduced capacity due to a COVID-19-related government order is eligible for the ERC.
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.
- A manufacturer that is unable to operate at full capacity due to supply chain disruptions is eligible for the ERC.
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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 amount of the credit varies depending on the quarter and the number of employees a business has.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.For 2020, a business may receive a maximum credit of $5,000 per employee.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.This means that a business could receive a credit of up to $7,000 per employee per quarter for the first three quarters of 2021, for a total of up to $21,000 per employee for the year.
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Claiming the Credit
How to Claim ERC for Federal Employment Tax Returns
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 may be used for any quarter that the business is 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.Businesses must submit Form 7200 to the IRS, Advance Payments of Employer Taxes and Credits.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.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 ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.Credit rates are 50% in 2020 and 70% during the first three-quarters of 2021.
Businesses should avoid double-dipping on other relief programs.For example, businesses cannot claim the ERC for wages that are also used to claim the Paid Family and Medical Leave Credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documenation
Keep detailed records for all wages that were paid to employees in the ERC period.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Amending 941 For Employee Retention Credit
Here are a couple of tips to help you with your recordkeeping:
- Keep a record of all your payroll documents, such as W-2 forms and 941s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime pay.
- Keep track of government orders affecting your business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can also contact the IRS for assistance 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.Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail stores which experienced a significant decrease in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Donations to nonprofit organizations have declined
- Hotels and hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons, spas
- Retail stores selling non essential goods
- Businesses that have been required to operate in a reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Costs increased for businesses due to COVID-19
Aside from these examples, businesses that have been fully or partly suspended by a government directive or who have experienced a significant drop in gross receipts as a result of COVID-19 are also eligible for ERC. Amending 941 For Employee Retention Credit
Below are some specific examples on how businesses have utilized the ERC.
- 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.
- A retail outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- 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.
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
Scammers are targeting businesses eligible for the Employee Retention Credit.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.
Warning Signs and Red Flags
Here are some warning signs and red flags to identify potential ERC scammers:
- They will refund you without looking at your records.
- The fees are high, or they take a large percentage of the refund.
- They use high-pressure sales tactics. Amending 941 For Employee Retention Credit
- They are not members of a reputable professional tax organization.
- Your personal or financial data is requested upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can report this activity by calling 1-800-829-1040.
Also, you should be cautious about protecting your financial and personal data.Never give out personal information to someone who contacts you without your permission.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
Also, we have provided some resources and tips for documenting and keeping 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’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
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Employee Retention Credit: Frequently Asked Questions
Amending 941 For Employee Retention Credit
What is the ERC?
It is a refundable tax credit available to businesses that were impacted by the COVID-19 pandemic.
This credit is equal in value to 50% of wages qualified to be paid in 2020. It is also equal in value to 70% of wages qualified to be paid in the first 3 quarters of 2021.
Who can receive the ERC?
Eligible businesses include those who have seen a significant decrease in gross revenues or have been suspended fully or partly due to government orders resulting from the COVID-19 Pandemic.
What is qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
The employer’s health insurance premiums are also included in the calculation of wages.
How can I claim my ERC?
The IRS will accept amended Forms 941 and 941-X from businesses to claim the ERC.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I need to repay the ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim ERC even if I have received a PPP Loan?
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 individuals claim ERC?
Self-employed individuals can apply for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can non-profit organizations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies with a foreign subsidiary claim ERC?
Yes, employers can claim ERC when they pay wages to foreign employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Wrong calculation on credit
- Include all wages that qualify
- Failure to amend Form 941-X on time.