The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.It’s designed to help employers keep their employees, even if the business is unable to function normally.
The ERC may be able to help keep your employees and business afloat if your company has been impacted.If you want to know more about the ERC or how to claim it visit the IRS’ website, consult a tax advisor or continue reading 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 CreditColorado Employee Retention Credit Subtraction
The Employee Retention Credit (ERC) is a refundable tax credit that businesses can claim for qualified wages paid to employees during the COVID-19 pandemic.It was established by the Coronavirus Aid, Relief, and Economic Security Act in March 2020 in order to help businesses retain their employees, even if it meant they could not operate normally.
ERCs can be obtained by businesses of any size, including those exempt from tax.For a business to be eligible, it must have suffered a significant decrease in gross revenues or been partially or completely suspended by a government order related to COVID-19.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can assist businesses in retaining their employees, covering payroll costs, as well as investing in their future.
Why was the ERC created?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can also be used to retain staff, which is important for a swift recovery.
The ERC, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.Businesses can claim ERC for qualified wages paid to employees not working as a result of COVID-19. For example, employees are furloughed from work or quarantined. Colorado Employee Retention Credit Subtraction
Impact of the ERC on Businesses and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.The ERC also helped to keep businesses afloat through the economic storm.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.It also contributed to the recovery of the economy by increasing consumer spending, and investing.
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Eligibility
The Employee Retention Credit (ERC) is a tax credit available to businesses that have been impacted by the COVID-19 pandemic. 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 primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.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, 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
There are two ways that businesses can qualify for ERC:
- 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
Below are examples and scenarios that illustrate each of the eligibility criteria:
An order of the government may suspend all or part of a program.
- ERC may be available for a restaurant that has to close because of a government directive.
- 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.
- ERC eligibility is for a manufacturer who is not able to operate at maximum capacity due to disruptions in 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 amount of credit depends on the number of employees and the quarter.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.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 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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Claiming 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.
Claim the ERC by Claiming it in Advance
Businesses have three choices for claiming ERCs:
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- Businesses who have already paid employment taxes may request a credit refund by filing IRS Form 941X.
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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.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 Documentation
Businesses must keep detailed records on all wages paid during the ERC.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. Colorado Employee Retention Credit Subtraction
Here are some helpful tips on documenting your records and documents:
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- 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 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
Businesses that have been affected by the COVID-19 Pandemic can apply for the Employee Retention Credit.Here are some businesses that could be eligible for Employee Retention Credit.
- Restaurants forced to close due to government orders
- Retail stores that experienced a significant decline in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and other hospitality businesses
- Travel and tourism companies
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- 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
These examples are not the only ones that qualify. Any business that has been suspended in whole or part by an order of government or that has seen a decline in gross sales due to COVID-19 could also be eligible. Colorado Employee Retention Credit Subtraction
Here are a few examples of specific ways businesses have used their ERC:
- A restaurant, which was forced to close due to an order from the government for a period of several months, was able use the ERC in order to keep their employees on the payroll.
- A retail store which experienced a drop of 50% in sales due COVID-19 could offset its payroll expenses by using the ERC.
- The ERC allowed a manufacturer who was not able to operate at its full capacity because of supply chain disruptions to continue producing essential goods and keep their employees on the payroll.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified 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
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
These warning signs will help you identify possible ERC scammers.
- They promise you will get a refund even if they don’t review your records.
- You will be charged high fees upfront, or a percentage of your refund.
- These salespeople use high-pressure tactics. Colorado Employee Retention Credit Subtraction
- They are not affiliated to a reputable organization of tax professionals.
- Your personal or financial data is requested upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you’re contacted by an ERC con artist, then you should report their activity to IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting personal information and financial data is equally important.Do not share your personal data with anyone who contacts uninvited.If you’re not sure if a company is legit or not, you should check reviews online. You can also contact the IRS.
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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 have also provided some tips and resources for recordkeeping and documentation.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support 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:
Colorado Employee Retention Credit Subtraction
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
This credit is equal 50% of qualified wage paid to employees for 2020 and 70% qualified wage paid to employees during the first three-quarters of 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 a qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Employer-paid health insurance premiums also qualify as wages.
How do I claim the ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended Form 941 X must be submitted within three years from the original date of Form 941.
Do I need to repay the ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim ERC if I received a loan from PPP?
You can still claim an ERC even though you received a loan through the Paycheck Protection Programme (PPP).
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self employed individuals claim ERC benefits?
Yes, you can get the ERC if you are a self-employed individual.
Self-employed persons can claim ERC by completing Schedule C.
Can non profit organizations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their 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?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- The credit calculation is incorrect
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.