COVID-19, a pandemic that has affected businesses of all types and sizes, has forced many to either lay off staff or close their business.Employee Retention (ERC) Credit is available to businesses that need it.
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.
If you are a business owner who has been impacted by the pandemic, the ERC can help you keep your employees on board and your business afloat.To learn more about the ERC and how to claim it, visit the IRS website, speak with a 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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Employee Retention CreditEmployee Retention Credit 2023 Explained
Employee Retention Tax Credit (ERC), also known as the Employee Retention Tax Credit, is a refundable tax credit that employers can claim for qualifying wages paid to their employees during COVID-19.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.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.
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 ERC formed?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC was established to assist businesses in keeping their employees employed so they can quickly reopen, resume normal operations and regain control of the situation once the pandemic has subsided.
ERC Benefits
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can also be used to retain staff, which is important for a swift 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. Employee Retention Credit 2023 Explained
Impact of the ERC on Businesses and the 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 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 only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.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
Business can qualify in two ways for the ERC
- Fully or partially suspended by a government order: A business that has been fully or partially suspended by a government order due to COVID-19 is eligible for the ERC.Businesses that are required to close down, operate with a reduced capacity or adhere to certain restrictions can be eligible for the ERC.
- Significant decline in gross receipts: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.Significant decline in Gross Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
Example Scenarios
You can use the following examples to demonstrate each eligibility criterion.
Fully or partially suspended by a government order:
- ERC may be available for a restaurant that has to close because of a government directive.
- ERC eligibility is granted to a gym that must operate at a lower capacity as a result of a government order relating to COVID-19.
Significant decline in gross receipts:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- ERC is available to manufacturers who are unable to run at full capacity because of supply chain disruptions.
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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 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.A business can receive up to $5,000 in credit per employee for the year 2020.
For the first quarters of 2021, the credit equals 70% of wages that are qualified. However, this is limited to $10,000 per quarter per employee.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 your Credit
How to Claim the ERC when Filing 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.
Claim the ERC in Advance
Businesses have three options for claiming the ERC:
- 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.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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 Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
Multiplying qualified wages by the credit rate applicable, the ERC can be calculated.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Avoid double-dipping when it comes to other relief programs.For example, businesses can’t claim the ERC if they are also claiming the Paid Family Leave Credit or 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 assist businesses in accurately calculating the amount they are entitled for as well as supporting their claim if the IRS audits it. Employee Retention Credit 2023 Explained
Here are a couple of tips to help you with your recordkeeping:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of the hours that employees work, including sick leave, vacation time, and holidays.
- 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 many resources to assist businesses in claiming the ERC. They include fact sheets, videos, and FAQs.Businesses can also call 1-800-829-1040 to get help from the IRS.
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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 closed due to government orders
- Retail stores that saw a significant fall in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality enterprises
- Travel and Tourism Businesses
- Entertainment and event business
- Personal care businesses
- Gyms, fitness studios
- Salons, spas
- Retail stores selling non essential goods
- Businesses who were forced to operate with a reduced capacity
- Businesses that are forced to implement new safety protocols
- Costs incurred by businesses as a result of 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. Employee Retention Credit 2023 Explained
Here are some specific examples of how businesses have used the ERC:
- A restaurant that had to close its doors for several weeks due to government orders was able, with the ERC, to keep all of its employees employed.
- 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.
- 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.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
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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
Here are some warning signs and red flags to identify potential ERC scammers:
- 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. Employee Retention Credit 2023 Explained
- They are not affiliated to a reputable organization of tax professionals.
- You will be asked to provide your personal information or financial details 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.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
Also, you should be cautious about protecting your financial and personal data.Do not share your personal data with anyone who contacts uninvited.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.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 qualify as an employer, please claim the ERC and get professional assistance if you require it.
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Employee Retention Credit: Frequently Asked Questions
Employee Retention Credit 2023 Explained
What is ERC?
This is a tax credit that can be refunded to businesses who were affected by the COVID-19 Pandemic.
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 is eligible for 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 a qualified wage?
Wages, salaries, tips, and bonuses are all included in the definition of a qualified wage.
All wages that are qualified include health insurance premiums paid to the employer.
How do you claim your ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.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 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 cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self-employed people claim the ERC?
Yes, self-employed individuals are eligible for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can non-profit organisations 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.
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?
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
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.