The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.Employee Retention Bonus (ERB) is a way to keep businesses afloat.
The ERC allows businesses to claim a tax credit on wages paid during a pandemic.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
If you own a small business and have been affected by the pandemic then the ERC will help you to keep your staff on board, as well as your business going.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 CreditDoes The Employee Retention Credit Reduce Payroll Tax Expense
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid during the COVID-19 pandemic.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.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was ERC formed?
The COVID-19 outbreak caused an economic slump that led many businesses, including small and large ones, to either lay off staff or shut down.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 can provide a significant financial boost to businesses that have been impacted by the pandemic.It can also help businesses retain their employees, which is essential for a quick recovery.
The ERC can be claimed by businesses even if no taxes are due.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. Does The Employee Retention Credit Reduce Payroll Tax Expense
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.It also helped businesses weather the storm and stay afloat.
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
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 a business’s gross receipts must have declined by at least 50% from the same quarterly period of the previous 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 for a business suspended fully or partly by a Government Order: An ERC can be awarded to a business that is suspended either completely or partially by an order of the government due 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.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
The following are some scenarios and examples that will help you understand each eligibility criteria.
Fully or partially suspended by a government order:
- ERC will cover a restaurant which is forced to close down by government orders.
- The ERC is available to gyms that are required to operate with a reduced capacity because of a COVID-19-related government order.
Significant decline in gross receipts:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- 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 (ERC), a tax-credit that businesses can claim, is for wages paid to qualified employees during the COVID-19 epidemic.The amount varies depending on how many employees are employed and what quarter it is.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.This could mean that an employer can get a credit up to $5,000 for 2020.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.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 the Credit
How to Claim ERC in Federal Employment Taxreturn
Businesses that wish to claim the Employee Retention credit (ERC), on their federal employment tax returns must use Form 941-X, Revised Employer’s Quarterly Tax Return, or Claim for Refund.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 options to claim the ERC.
- Claim the credit in advance: Businesses can claim the credit in advance by reducing their quarterly employment tax deposits.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Reduce employment taxes deposits. Businesses are also able to reduce their quarterly employment tax deposits by the amount expected credit.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- Request a refund: Businesses that have already paid their employment taxes can request a refund of the credit by filing Form 941-X with the IRS.
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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Avoid double-dipping when it comes to other relief programs.Businesses can’t, for instance, claim ERC wages if they also claim Paid Family Leave Credit (PFML) or Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documenation
Businesses must keep detailed records on all wages paid during the ERC.This will allow businesses to calculate accurately the amount of credit they are entitled to and support their claim in the event that it is audited. Does The Employee Retention Credit Reduce Payroll Tax Expense
Here are some helpful tips on documenting your records and documents:
- 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 all the wages that employees receive, including overtime, bonuses, and base wages.
- Keep track of any orders from the government that may affect your business.
The IRS provides many resources to assist businesses in claiming the ERC. They include fact sheets, videos, and FAQs.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses that are affected by COVID-19 can receive the Employee Retention (ERC).These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail stores that saw a significant fall in sales
- Disruptions in the supply chains prevent manufacturers from working at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality business
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Retail shops selling non-essential items
- Businesses required to operate under reduced capacity
- Businesses that are forced to implement new safety protocols
- Costs increased for businesses 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. Does The Employee Retention Credit Reduce Payroll Tax Expense
Here are some examples that show how businesses have used ERCs:
- 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.
- The ERC was used by a retail store to offset payroll costs after it experienced a 50% drop in sales as a result of COVID-19.
- 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.
- An organization that had seen its donations drop due to COVID-19 could use the ERC in order to keep their employees on the payroll and continue to offer 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
Scammers are targeting businesses eligible for the Employee Retention Credit.Scammers will use aggressive marketing techniques to get businesses to sign up, even if they are not eligible for 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 high upfront fees or a percentage of your refund.
- High-pressure sales tactics are used. Does The Employee Retention Credit Reduce Payroll Tax Expense
- They are not affiliated to a reputable organization of tax professionals.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
Protecting personal information and financial data is equally important.Don’t give out your personal details to anyone who contacts without asking.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
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 explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
Also, we have provided some resources and tips for documenting and keeping records.ERCs are a valuable tool that employers can use to lower their employment tax liability and improve their cash flow. They also help support their workforce.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 Credit Frequently Asked Questions:
Does The Employee Retention Credit Reduce Payroll Tax Expense
What is ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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 can receive the ERC?
Businesses that have experienced a significant drop in gross receipts or those that were suspended or fully suspended by government orders due to the COVID-19 epidemic are eligible for the ERC.
What is qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
Employer-paid health insurance premiums also qualify as wages.
How do I claim the ERC?
The IRS will accept amended Forms 941 and 941-X from businesses to claim the ERC.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 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 benefits?
Yes, individuals who are self-employed can qualify for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non-profit organisations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies that own a foreign affiliate claim ERCs?
Businesses can claim ERC for the wages they pay to foreign-based employees.
Before you can get it, however, you must meet some additional requirements.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Wrong calculation on credit
- All wages are not included
- Failure to amend form 941 – X on time.