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).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.It is designed to help businesses keep their employees on payroll, even if they are unable to 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.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 CreditEmployee Retention Credit Benefits
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages during the COVID-19 Pandemic.It was created as part of the Coronavirus Aid, Relief, and Economic Security Act, in March 2020, to help companies keep their employees, despite being unable operate normally.
ERC is open to businesses and organizations of all sizes.To be eligible for the ERC, a company must have had a significant fall in gross receipts and/or have been fully or partial suspended as a result of an COVID-19 government order.
The ERC is able to provide significant financial support for businesses affected by the pandemic.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’s purpose was to keep employees on the payroll so that businesses could quickly reopen their doors and resume normal operation once the COVID-19 pandemic had subsided.
ERC Benefits
ERCs can give businesses impacted by pandemics a financial boost.It can also be used to retain staff, which is important for a swift recovery.
Businesses can claim the ERC even if they don’t owe taxes.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 Benefits
Impact of ERCs on the Economy and Businesses
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.The ERC has helped many businesses stay afloat during the COVID-19 pandemic.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.It has also contributed to the economic recovery by boosting consumer spending and investment.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.In 2020, a business must have experienced a significant decline in gross receipts of at least 50% compared to the same quarter in 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
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 ordered to close, reduce capacity or comply with certain restrictions are eligible for 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 revenues is defined as at least a 50% decline in a quarterly in 2020, or at least a 20% decline in a quarterly in 2021 when compared with the same quarter the previous year.
Examples and Scenarios
You can use the following examples to demonstrate each eligibility criterion.
Fully or partially suspended by a government order:
- ERC will cover a restaurant which is forced to close down by government orders.
- 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.
- 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 the credit is dependent on the business’s quarter and employees.
The credit for 2020 is equal 50% of the wages qualified to be paid to employees. This maximum can reach $10,000 per employee.For 2020, a business may receive a maximum credit of $5,000 per employee.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.This means that a business could receive a credit of up to $7,000 per employee per quarter for the first three quarters of 2021, for a total of up to $21,000 per employee for the year.
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Claim the Credit
How to Claim the 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 submitted for any quarter where the business was entitled to the credit.
Options for Claiming the ERC in Advance
Businesses have three options to claim the ERC.
- Claim the credit ahead of time: Businesses may claim the credit by reducing the quarterly employment tax deposit.Businesses must submit Form 7200 to the IRS, Advance Payments of Employer Taxes and Credits.
- 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.
- Businesses that already pay their employment taxes to the IRS can request a reimbursement of the credit. To do this, they must file Form 941X.
Calculating the Amount of the Credit 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.
Avoid double-dipping when it comes to other relief programs.For example businesses cannot claim ERC for wages used to claim Paid Family and medical leave credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should keep detailed records detailing all qualified wages paid by employers to employees over the ERC.This will help businesses to accurately calculate the amount of the credit they are eligible for and to support their claim if it is audited by the IRS. Employee Retention Credit Benefits
Here are some helpful tips on documenting your records and documents:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track of the hours that employees work, including sick leave, vacation time, and holidays.
- 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.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can contact the IRS by calling 1-800-829-1040.
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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 stores who experienced a significant drop in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Donations to nonprofit organizations have declined
- Hotels and other hospitality businesses
- Travel and tourism companies
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons & spas
- Stores that sell non-essential merchandise
- Businesses that had to operate on a lower capacity
- Businesses that were forced to implement new safety measures and protocols
- Costs increased for businesses due to 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. Employee Retention Credit Benefits
Below are some specific examples on how businesses have utilized the ERC.
- A restaurant that was forced to close for several months due to a government order was able to use the ERC to keep its employees on the payroll.
- 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.
- ERC can be used by a producer who is unable operate at maximum capacity due to disruptions of the supply chain. This allows them to keep their employees and continue producing essential products.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
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
These warning signs will help you identify possible ERC scammers.
- They promise to get you a refund without reviewing your records.
- The fees are high, or they take a large percentage of the refund.
- Sales tactics are high-pressure. Employee Retention Credit Benefits
- They aren’t affiliated with an established tax professional association.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can call 1-800-829-1040 for more information or go to the IRS web site.
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
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 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.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
Employee Retention Credit Benefits
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax 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 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?
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 ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended form 941-X is required to be filed within 3 years from the date that the original Form 941 has been filed.
Do I have to pay back the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim the ERC if I 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.
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.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies that own a foreign affiliate claim ERCs?
You can claim ERC on wages paid to foreign subsidiaries.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- The credit calculation is incorrect
- Failure to include all qualified wages
- Failure to amend form 941 – X on time.