The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees. But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
The ERC allows businesses to claim a tax credit on wages paid during a pandemic. It’s designed to help employers keep their employees, even if the business is unable to function normally.
The ERC may be able to help keep your employees and business afloat if your company has been impacted. To find out more about ERC and to claim, you can either visit the IRS web site, speak with an advisor, or check 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 Calculation
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid 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.
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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can help businesses to retain employees, pay for payroll, and invest in the future.
Why was ERC created?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.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
The ERC is a great way to boost the finances of businesses affected by pandemics.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 can also claim the ERC for qualified wages paid to employees who are not working due to COVID-19, such as employees who are furloughed or quarantined. Employee Retention Credit Calculation
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.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.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, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
The ERC is available to businesses in two different 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 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: An eligible business who has suffered a significant decrease in gross receipts as a result of COVID-19 may also be eligible for 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.
Example Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
Full or partial suspension by government order
- ERC can be claimed by a restaurant forced to shut down due to an order from the government.
- 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:
- ERC may be available for a retailer that suffers a drop of 50% in sales caused by COVID-19.
- ERC can be awarded to a manufacturer who cannot operate at full capability due to disruptions to the supply chain.
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Credit Amount
The Employee Retention Credit (ERC) is a tax credit that businesses can claim for qualified wages paid to employees during the COVID-19 pandemic.The amount varies depending on how many employees are employed and what quarter it is.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.This means that a business could receive a credit of up to $5,000 per employee for 2020.
For the first three quarters of 2021, the credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per quarter per employee.A business could receive credit up to $7000 per employee, per quarter for the three first quarters of the year 2021.
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Claim the Credit
How to Claim ERC in Federal Employment Taxreturn
To claim the Employee Retention Credit (ERC) on federal employment tax returns, businesses must file an amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.This form can be submitted for any quarter where the business was entitled to the credit.
Claim the ERC in Advance
Businesses can claim the ERC in three ways:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.To do this, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.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 ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.Credit rates are 50% in 2020 and 70% during the first three-quarters of 2021.
Businesses should be careful to avoid double-dipping with 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
Businesses should keep detailed records of all qualified wages paid to employees during the ERC period.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. Employee Retention Credit Calculation
Here are a few tips for documenting and keeping records:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Track all employee wages, including bonuses, overtime, and base pay.
- Keep track of any orders from the government that may affect your business.
The IRS provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (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 business
- Travel and tourism companies
- Entertainment and Event Businesses
- Personal care businesses
- Gyms, fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- Businesses that were required to operate at a reduced capacity
- Businesses that are forced to implement new safety protocols
- Costs incurred by businesses as a result of COVID-19
The ERC may also be available to businesses that were suspended or partially by government orders or experienced a substantial decline in gross revenues due to COVID-19. Employee Retention Credit Calculation
Here are a few examples of specific ways businesses have used their ERC:
- An employee of a restaurant forced to close down by government order for a few months was able to continue to be paid through the ERC.
- 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.
- A nonprofit that saw their donations decrease due to COVID-19, was able to utilize the ERC and keep its employees employed to continue to provide vital services.
You should contact a professional tax advisor if, as a small business owner, you have any doubts about your eligibility for the ERC.They can determine your qualification and help you claim the credit.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Scammers are targeting businesses eligible for the Employee Retention Credit.These scammers use aggressive marketing to convince businesses to subscribe to their services even if that business isn’t eligible for the Employee Retention Credit (ERC).
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- They promise you will get a refund even if they don’t review your records.
- They charge high fees upfront or take a portion of your refund.
- These salespeople use high-pressure tactics. Employee Retention Credit Calculation
- 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.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
Also, you should be cautious about protecting your financial and personal data.Don’t give out your personal details to anyone who contacts without asking.If you want to know if a particular business is legit, check online reviews. Or contact the IRS.
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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.We have discussed the ERC eligibility requirements, claim process and potential 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 are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Employee Retention Bonus Frequently Answered Questions
Employee Retention Credit Calculation
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
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?
Eligible businesses for the ERC include those who experienced a significant decline in gross receipts or were fully or partially suspended due to government orders caused by the COVID-19 pandemic.
What are qualified wages?
Included in qualifying wages are wages, salaries, and tips paid to employees.
Health insurance premiums paid by the employer are also considered qualified wages.
How do I claim ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended Form 941 X must be submitted within three years from the original date of Form 941.
Do I have to repay my ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim ERC if I received a loan from PPP?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self employed individuals claim ERC benefits?
Yes, individuals who are self-employed can qualify for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can nonprofit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
It is important to note that there are additional requirements for claiming the tax credit.
Are there common mistakes that businesses make when claiming ERC to watch out for?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- Credit calculation error
- Inclusion of all eligible wages
- Failure to amend Form 941-X on time.