The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.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.The ERC was created to ensure that businesses can continue to pay employees during a pandemic, even if their normal business operations are disrupted.
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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The Employee Retention CreditEmployee Retention Credit Center Cares Act
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 by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 to help businesses keep their employees on the payroll, even if they were unable to 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 be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC created?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can also assist businesses in retaining their employees. This is vital for a fast recovery.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.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 Center Cares Act
Impact of ERC on Business and the Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It also helped businesses weather the storm and stay afloat.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.The ERC also contributed positively to the recovery in terms of consumer spending as well as investment.
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Eligibility
The Employee Retention Credit (ERC) can be claimed by businesses that have suffered a decline in gross sales or been suspended because of a COVID-19 government order.
The test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.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 organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
Business Qualifications
Businesses can qualify for the ERC in two ways:
- 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 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.
Orders from the government can be used to suspend or fully suspend your work.
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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 can be awarded to a retail store that has experienced a 50% decrease in sales because of 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 of the credit is dependent on the business’s quarter and employees.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.This could mean that an employer can get a credit up to $5,000 for 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.For the first three-quarters of 2021, a business can receive up to $7,000 in credit per employee. This could amount to up to $21,000 for each employee.
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Claiming the Credit
How to Claim ERC for 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 may be used for any quarter that the business is eligible for the credit.
Claim the ERC by Claiming it in Advance
Businesses have three options to claim the ERC.
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To do so, businesses must fill out Form 941 at the IRS. They will need to indicate how much credit they intend to reduce.
- 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 employee wages with the applicable credit rate will give you the ERC.The credit rate is 50% for 2020 and 70% for the first three 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
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.This will enable businesses to accurately determine the amount of credit that they are eligible for, and to back up their claim should it be audited. Employee Retention Credit Center Cares Act
Here are some tips for 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.
- 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 also contact the IRS for assistance by calling 1-800-829-1040.
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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 forced to close due to government orders
- Retail shops that have experienced a substantial 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 enterprises
- Travel and tourism companies
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- Salons, spas
- Retail stores that sell non-essential products
- Businesses who were forced to operate with 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 Center Cares Act
Here are some examples that show how businesses have used ERCs:
- 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.
- 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.
- ERC allows a company to maintain its workforce and produce essential products despite being unable to run at full capacity.
- 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.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.They can determine your qualification and help you claim the credit.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).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).
Warning Signs and Red Flags
Here are some warning signs and red flags to identify potential ERC scammers:
- The company promises to give you a full refund without reviewing any of your records.
- You will be charged high fees upfront, or a percentage of your refund.
- The salespeople are aggressive and use high-pressure tactics. Employee Retention Credit Center Cares Act
- They are not affiliated with a reputable tax professional organization.
- Your personal or financial data is requested upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
Protecting your financial and personal information is also important.Never give out personal information to someone who contacts you without your permission.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, 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 explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
We’ve also included some resources and advice on recordkeeping.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and support their workforce.If you’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
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Employee Retention Credit Frequently Asked Questions:
Employee Retention Credit Center Cares Act
What is ERC?
It is a refundable tax credit available to businesses that were impacted by the COVID-19 pandemic.
This credit equals 50% of the qualified wages that employees received in 2020, and 70% of the qualified wages they receive in the first quarter of 2021.
Who can apply for the ERC program?
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 are qualified wages?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Employer-paid health insurance premiums also qualify as wages.
How can I claim my ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I have to repay my 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 if I received a loan from PPP?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed people claim the ERC?
Yes, you can get the ERC if you are a self-employed individual.
Self-employed individuals can claim the ERC on their Schedule C form.
Can nonprofit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies that own a foreign affiliate claim ERCs?
Businesses can claim ERC for the wages they pay to foreign-based employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
What are the common mistakes businesses make when they claim ERC?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Incorrect credit calculation
- The failure to include all qualifying wages
- Failing to amend Forms 941-X within the specified timeframe.