The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
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.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 CreditDeadline For Filing For Employee Retention Credit
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.
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 be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC formed?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.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 also assist businesses in retaining their employees. This is vital for a fast recovery.
The ERC can be claimed by businesses even if no taxes are due.Businesses may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. Deadline For Filing For Employee Retention Credit
Impact of the ERC on Businesses and the Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.The ERC has helped many businesses stay afloat during the COVID-19 pandemic.
The ERC is estimated to have saved over 10 million jobs and prevented hundreds of thousands of businesses from closing their doors.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) can be claimed by businesses that have suffered a decline in gross sales or been suspended because of a COVID-19 government order.
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.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 enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period in the previous year.
Business Qualifications
Business can qualify in two ways for the ERC
- ERC eligibility is based on whether the business has been suspended completely or in part due to COVID-19.The ERC is available to businesses that have been told to close or operate at reduced capacity.
- Significant decline in gross revenues: Businesses that have experienced a significant drop in gross revenue due to COVID-19 are also 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.
Example Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
Fully or partially suspended by a government order:
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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 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 (ERC) Credit is an income tax credit which businesses can claim in relation to wages that were paid during the COVID-19 Pandemic.The amount of credit depends on the number of employees and the quarter.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.For 2020, a business may receive a maximum credit of $5,000 per employee.
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 your Credit
How to Claim ERC on Federal Employment Tax Returns
Businesses must amend Form 941X, Adjusted Employer’s Quarterly Federal Income Tax Return or Claim For Refund, to claim the Employee retention credit (ERC) in federal employment tax returns.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 options for claiming the ERC:
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.To do this, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.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 can ask for a refund if they have already paid the employment tax. They should file Form 941-X at the IRS.
Calculating the Credit Amount and Avoiding Double Dipping with Other Relief Programs
Multiplying the amount of ERC by the credit rate is how the ERC amount is calculated.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should be aware of the dangers of double-dipping.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
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. Deadline For Filing For Employee Retention Credit
Here are some tips on recordkeeping and documentation.
- 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 provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can call the IRS at 1-800-829-1040 for assistance.
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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.These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail shops that have experienced a substantial decline in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Donations for nonprofit organizations are down
- Hotels and other hospitality business
- Travel and tourism business
- Entertainment and Event Businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Retail stores selling non-essential goods
- Businesses required to operate under reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Costs incurred by businesses as a result of 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. Deadline For Filing For Employee Retention Credit
Here are some examples that show how businesses have used ERCs:
- 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 that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its payroll costs.
- 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 whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing essential services.
If you are an owner of a business and are unsure as to whether you are eligible for ERC, then I would encourage you contact a tax specialist.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, some scammers take advantage of companies that qualify for the Employee Retention Credit.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.
Warning Signs and Red Flags
Here are some warnings and red flags for identifying potential ERC fraudsters:
- The company promises to give you a full refund without reviewing any of your records.
- You will be charged high fees upfront, or a percentage of your refund.
- They use high-pressure sales tactics. Deadline For Filing For Employee Retention Credit
- They do not belong to an organization that is reputable.
- Your personal or financial data is requested upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you are contacted by an ERC scammer, you should report the activity to the IRS.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
You should also be careful to protect your personal and financial information.Don’t give out your personal details to anyone who contacts without asking.If you are unsure whether or not a business is legitimate, you can check their reviews online or contact the IRS for assistance.
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Conclusion
In this article, the Employee Retention credit (ERC) is discussed. It’s a tax relief program that helps eligible employers retain their employees during the COVID-19 outbreak.The ERC has been explained in detail, including the eligibility requirements and the claim process.
We have also provided tips and resources on 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:
Deadline For Filing For Employee Retention Credit
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
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 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 are qualified wages?
Wages, salaries, tips, and bonuses are all included in the definition of a qualified wage.
Health insurance premiums paid by the employer are also considered qualified wages.
How do you claim your ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I need to repay the ERC?
The ERC, however, is a non-refundable tax credit.
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 ERCs for wages they also claimed as PPPs.
Can self-employed individuals claim the ERC?
Self-employed individuals can apply for the ERC.
Schedule C forms can be claimed by individuals who are self-employed.
Can non-profit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofit organizations can claim the ERC on their Form 990-T form.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
What are the common mistakes businesses make when they claim ERC?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Calculation error on credit
- Inclusion of all eligible wages
- Failing to amend Forms 941-X within the specified timeframe.