The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their employees during the pandemic.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
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.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 CreditCares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
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.
ERC is open to businesses and organizations of all sizes.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.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can help businesses to retain employees, pay for payroll, and invest in the future.
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.
Benefits of the ERC
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 also a refundable credit. This means that businesses are able to claim it, even if there are no taxes due.Businesses can also claim the ERC for qualified wages paid to employees who are not working due to COVID-19, such as employees who are furloughed or quarantined. Cares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
The Impact of the ERC in the Business and Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It has also helped businesses to stay afloat and weather the economic storm.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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, 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 is available to businesses that have been suspended in whole or part by government orders due to COVID-19.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- 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.A significant decline in gross receipts is defined as a decline of at least 50% in a quarter in 2020 or at least 20% in a quarter in 2021 compared to the same quarter in the previous year.
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 can be awarded to a fitness center that has to operate on a reduced basis due to an order from the government based on COVID-19.
Significant decline in gross receipts:
- ERC is available to retail stores that experience a 50% drop in sales as a result 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 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.For 2020, a business may receive a maximum credit of $5,000 per employee.
The credit for the first three quarters of 2021 is 70% of the qualified wages paid by employees. This maximum amount per employee per quarter is $10,000.This means a company could receive a credit for up to $7,000 for each employee per quarter in the first three months of 2021. The total for the entire year is up to $21,000.
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Claim the Credit
How to Claim the ERC on Federal Employment Tax Returns
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.
Claim the ERC by Claiming it in Advance
There are three options available to businesses for claiming ERC:
- Claim the credit ahead of time: Businesses may claim the credit by reducing the quarterly employment tax deposit.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.
- 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 Amount of the Credit 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
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.This will assist businesses in accurately calculating the amount they are entitled for as well as supporting their claim if the IRS audits it. Cares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
Here are some tips for recordkeeping and documentation:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of all the hours worked by your employees including holidays, sick days, and vacations.
- Keep track of all wages paid to employees, including base wages, bonuses, and overtime pay.
- Keep track of any orders from the government that may 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 impacted by COVID-19 are eligible for the Employee retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail shops that have experienced a substantial decline 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 business
- Travel and tourism companies
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- Salons & spas
- Retail stores that sell non-essential products
- Businesses required to operate under reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Businesses that experienced increased 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. Cares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
Here are a few examples of specific ways businesses have used their ERC:
- The ERC allowed a restaurant to retain its staff after it was forced to shut down for several months by government order.
- A retail store which experienced a drop of 50% in sales due COVID-19 could offset its payroll expenses by using the ERC.
- 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 are a business owner and you are unsure whether or not you are eligible for the ERC, I encourage you to contact a tax professional.They can help you to determine your eligibility and to claim the credit if you are eligible.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (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
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They promise you will get a refund even if they don’t review your records.
- They charge high upfront fees or a percentage of your refund.
- These salespeople use high-pressure tactics. Cares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
- They aren’t affiliated with an established tax professional association.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC fraudster, you must report this activity to the IRS.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
Also, you should be cautious about protecting your financial and personal data.Do not share your personal data with anyone who contacts uninvited.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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Conclusion
This article has discussed the Employee retention credit (ERC), which is a tax relief that allows eligible employers to keep their employees employed during the COVID-19 Pandemic.The ERC has been explained in detail, including the eligibility requirements and the claim process.
We’ve also included some resources and advice on recordkeeping.The ERC provides a valuable incentive that helps employers to reduce their payroll tax liability, improve the cash flow of their business, and provide support for their employees.We encourage eligible employers to claim this credit and, if necessary, seek professional help.
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Employee Retention Credit: Frequently Asked Questions
Cares Act – Employee Retention Credit (Erc) Payroll/Payroll Tax Credit Expansion
What is ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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 can apply for the ERC program?
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 qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
All wages that are qualified include health insurance premiums paid to the employer.
How do I claim the ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I have to repay my 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 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 cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self employed individuals claim ERC benefits?
Yes, the ERC is available to self-employed people.
Schedule C forms can be claimed by individuals who are self-employed.
Can non-profit organisations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Yes, employers can claim ERC when they pay wages to foreign employees.
It is important to note that there are additional requirements for claiming the tax credit.
Are there mistakes that companies make in claiming ERCs?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Incorrect credit calculation
- Inclusion of all eligible wages
- Failure to amend Forms 901-X by deadline