The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
The ERC can be claimed by businesses on the wages they paid employees who qualified during pandemic.The ERC was created to ensure that businesses can continue to pay employees during a pandemic, even if their normal business operations are disrupted.
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.
Employee Retention CreditEmployee Retention Credit 2023 Qualifications
Employee Retention credit (ERC), a refundable income tax credit, is available to businesses for wages paid by them during the COVID-19 epidemic.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.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 be used to help businesses keep their employees, cover their payroll costs and invest for the future.
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 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, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.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 Qualifications
Impact of ERC on Businesses and the Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.The ERC also helped to keep businesses afloat through the economic storm.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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 an enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period in the previous year.
Businesses can qualify for the ERC in two ways:
- 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 of gross receipts. A business which has seen a significant fall in its gross receipts because of COVID-19, is also eligible to receive the ERC.Significant declines in revenue are defined as a decrease of at minimum 50% in 2020 quarters or at most 20% in 2021 quarters compared to same quarters the year before.
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 is available to restaurants that are forced to close by a government order.
- 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 may be available for a retailer that suffers a drop of 50% in sales caused by COVID-19.
- A manufacturer that is unable to operate at full capacity due to supply chain disruptions is eligible for the ERC.
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.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.For 2020, a business may receive a maximum credit of $5,000 per employee.
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.
Claiming the Credit
How to Claim the ERC when Filing Federal Employment Tax Returns
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 is applicable to any quarter during which the business qualifies for the credit.
Claim the ERC in Advance
Businesses have three options for claiming the ERC:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Reduce employment taxes deposits. Businesses are also able to reduce their quarterly employment tax deposits by the amount expected credit.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits 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 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 avoid double-dipping on other relief programs.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 must keep detailed records on all wages paid during the ERC.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Employee Retention Credit 2023 Qualifications
Here are some tips on recordkeeping and documentation.
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- 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.
- Track any government orders which may have an impact on the 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.
Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).The following are examples of businesses that may be eligible for the Employee Retention Credit (ERC):
- Restaurants are forced to close by government order
- Retail stores that experienced a significant decline in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- 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, spas
- Retail shops selling non-essential items
- Businesses that were required to operate at a reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Businesses who experienced higher costs due to COVID-19
Aside from these examples, businesses that have been fully or partly suspended by a government directive or who have experienced a significant drop in gross receipts as a result of COVID-19 are also eligible for ERC. Employee Retention Credit 2023 Qualifications
Below are some specific examples on how businesses have utilized the 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.
- 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 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.
Risks of ERC Scams and Aggressive Marketing
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.
Warning Signs and Red Flags
Here are some warning signals and red flags that can help you to identify 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.
- Sales tactics are high-pressure. Employee Retention Credit 2023 Qualifications
- They are not members of a reputable professional tax organization.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Activities and Protecting 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.
You should also be careful to protect your personal and financial information.Do not give your personal information to anyone who contacts you unsolicited.If you’re not sure if a company is legit or not, you should check reviews online. You can also contact the IRS.
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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
We have also provided some tips and resources for recordkeeping and documentation.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’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
Employee Retention Credit Frequently Asked Questions:
Employee Retention Credit 2023 Qualifications
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 is eligible to apply for ERC?
Eligible businesses include those who have seen a significant decrease in gross revenues or have been suspended fully or partly due to government orders resulting from the COVID-19 Pandemic.
What is a qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Also, health insurance premiums that employers pay are considered wages.
How do you claim your ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended Form 941 X must be submitted within three years from the original date of Form 941.
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?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses cannot claim ERCs for wages they also claimed as PPPs.
Can self-employed individuals claim ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can non profit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for 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?
You can claim ERC on wages paid to foreign subsidiaries.
There are a few additional requirements to meet before you can claim the benefit.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
When claiming your ERC; businesses must be aware of the following mistakes:
- Calculation error on credit
- Inclusion of all eligible wages
- Failure to amend Forms 901-X by deadline