The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their 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 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 Cash Flow Statement
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 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 qualify, the business must have seen a significant reduction in gross sales or be suspended fully or partly due to an order from the government related to COVID-19.
The ERC is able to provide significant financial support for businesses affected by the pandemic.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was the 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
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can also be used to retain staff, which is important for a swift 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 Cash Flow Statement
Impact of ERC on Businesses and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped companies to weather the economic storm and remain afloat.
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
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 an enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period in the previous year.
Business Qualifications
Two ways exist for businesses to qualify 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: 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 Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
Examples and 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.
- ERC may be available for a gym which is forced to operate at reduced capacity by a COVID-19 government order.
Significant decline in gross receipts:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to 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 credit amount varies according to the quarter and number of employees of a business.
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.
The credit for the first three quarters of 2021 is 70% of the qualified wages paid by employees. This maximum amount per employee per quarter is $10,000.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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Claiming the Credit
How to Claim 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 filed for any quarter in which the business was eligible for the credit.
Claim the ERC in Advance
Businesses have three options to claim the ERC.
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.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 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 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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should be aware of the dangers of double-dipping.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 Documentation
Keep detailed records for all wages that were paid to employees in 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 Cash Flow Statement
Here are a couple of tips to help you with your recordkeeping:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track of every employee’s hours, including sick time, holiday, and vacation.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime pay.
- Track any government orders which may have an impact on the 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 affected by the COVID-19 virus can claim an Employee Retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail stores that saw a significant fall in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Nonprofit organizations that saw their donations decline
- Hotels and hospitality businesses
- Travel and tourism business
- Entertainment and event business
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- Businesses required to operate under reduced capacity
- Businesses that are forced to implement new safety protocols
- Businesses who experienced higher costs 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. Employee Retention Credit Cash Flow Statement
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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because 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 own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.You can get help from a tax professional to determine your eligibility for the ERC and claim it if eligible.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (ERC).Scammers will use aggressive marketing techniques to get businesses to sign up, even if they are not eligible for ERC.
Warning Signs and Red Flags
These warning signs will help you identify possible ERC scammers.
- They promise to get you a refund without reviewing your records.
- You will be charged high fees upfront, or a percentage of your refund.
- They use high-pressure sales tactics. Employee Retention Credit Cash Flow Statement
- They aren’t affiliated with an established tax professional association.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you have been contacted by an ERC scammer , you should notify the IRS .Call 1-800-829-1040 to report the scam or visit the IRS 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 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
We have covered the Employees Retention (ERC) Credit in this article. This is a tax credit program that helps employers who qualify to retain their staff 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 tips and resources on recordkeeping and documentation.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit Cash Flow Statement
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 companies for the ERC are those businesses that experienced a significant fall in gross sales or were partially or completely suspended because of government orders triggered by the COVID-19 outbreak.
What is a qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
Health insurance premiums paid by the employer are also considered qualified wages.
How do I claim ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I have to pay back the ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim the ERC if I received a PPP loan?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim ERC?
Yes, the ERC is available to self-employed people.
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 can claim the ERC on their Form 990-T form.
Can companies with a foreign subsidiary claim ERC?
Yes, employers can claim ERC when they pay wages to foreign employees.
That said, there are some additional requirements that must be met before they can claim it.
What are the common mistakes businesses make when they claim ERC?
When claiming your ERC; businesses must be aware of the following mistakes:
- Wrong calculation on credit
- The failure to include all qualifying wages
- Failure to amend Forms 901-X by deadline