The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to employees during the pandemic.It is designed to help businesses keep their employees on payroll, even if they are unable to operate normally.
The ERC is a great way to keep your employees engaged and your business running smoothly if you’re a business owner impacted by the pandemic.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.
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The Employee Retention CreditEmployee Retention Credit Drake Software
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 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.
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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was ERC created
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.
Benefits of the ERC
ERCs can give businesses impacted by pandemics a financial boost.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC is also a refundable credit. This means that businesses are able to claim it, even if there are no taxes due.Businesses can claim ERC for qualified wages paid to employees not working as a result of COVID-19. For example, employees are furloughed from work or quarantined. Employee Retention Credit Drake Software
Impact of ERC on Businesses and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.It has also helped businesses to stay afloat and weather the economic storm.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
The Employee Retention Credit (ERC) is a tax credit available to businesses that have been impacted by the COVID-19 pandemic. To be eligible, a business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to a COVID-19-related 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 enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period in the previous year.
Business Qualifications
The ERC is available to businesses in two different ways.
- ERC eligibility is based on whether the business has been suspended completely or in part due to 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 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:
A government order can suspend a person’s rights in full or part
- ERC is available to restaurants that are forced to close by a government order.
- ERC can be awarded to a fitness center that has to operate on a reduced basis due to an order from the government based on COVID-19.
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.
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Credit Amount
Employee Retention Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The amount of the credit is dependent on the business’s quarter and employees.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $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.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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Claiming Credit
How to Claim ERC in Federal Employment Taxreturn
To claim the Employee-Retention Credit (ERC), businesses must file a Form 941-941-X, Adjusted Employer Quarterly Federal Tax return or Claim of Refund.This form can be submitted for any quarter where the business was entitled to the credit.
Claim the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.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 who have already paid their Employment Taxes can request to receive a refund for the credit by submitting Form 941X to the IRS.
Calculating the Credit Amount and Avoiding Double Dipping with Other Relief Programs
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
Businesses should be careful to avoid double-dipping with 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 Documentation
Keep detailed records for all wages that were paid to employees in the ERC period.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Employee Retention Credit Drake Software
Here are some tips for recordkeeping and documentation:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- 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.
The IRS provides many resources to assist businesses in claiming the ERC. They include fact sheets, videos, and FAQs.Businesses can contact IRS for help 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.
- Government orders force restaurants to close
- Retail stores that saw a significant fall in sales
- Disruptions in the supply chains prevent manufacturers from working at full capacity
- Nonprofit organizations that saw their donations decline
- Hotels and other hospitality enterprises
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons, spas
- Stores that sell non-essential merchandise
- Businesses required to operate under reduced capacity
- Businesses forced to comply with new safety protocols
- Costs increased for businesses due to 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 Drake Software
Here are a few examples of specific ways businesses have used their ERC:
- The ERC allowed a restaurant to retain its staff after it was forced to shut down for several months by government order.
- 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 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.
- 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 help determine your eligibility as well as claim the credit for you if you’re eligible.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Scammers are targeting businesses eligible for the Employee Retention Credit.These scammers might use aggressive advertising tactics to convince businesses that they should sign up for their service, even though the business may not be eligible for ERC.
Red Flags and Warning Signs
Here are some warning signals and red flags that can help you to identify ERC scammers.
- The company promises to give you a full refund without reviewing any of your records.
- The fees are high, or they take a large percentage of the refund.
- High-pressure sales tactics are used. Employee Retention Credit Drake Software
- They are not affiliated with a reputable tax professional organization.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the 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.
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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 also have some tips and materials for documenting your records.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.We encourage eligible employers to claim this credit and, if necessary, seek professional help.
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Employee Retention Bonus Frequently Answered Questions
Employee Retention Credit Drake Software
What is the ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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 can receive the 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 qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
The employer’s health insurance premiums are also included in the calculation of wages.
How do you claim your ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I have to pay back the ERC?
No, the ERC is a refundable tax credit, which means that businesses do not need to repay it.
Can I claim the ERC if I received a PPP loan?
You can still claim an ERC even though you received a loan through the Paycheck Protection Programme (PPP).
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed people claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can nonprofit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies that own a foreign affiliate claim ERCs?
Businesses can claim ERC for the wages they pay to foreign-based employees.
That said, there are some additional requirements that must be met before they can claim it.
Are there mistakes that companies make in claiming ERCs?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Calculation error on credit
- Include all wages that qualify
- Failing to amend Forms 941-X within the specified timeframe.