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).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of 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 own a small business and have been affected by the pandemic then the ERC will help you to keep your staff on board, as well as your business going.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 Fiscal Year
The Employee Retention Credit (ERC) is a refundable tax credit that businesses can claim for qualified wages paid to employees during the COVID-19 pandemic.It was created in March of 2020 by the Coronavirus Aid, Relief, and Economic Security Act to help employers keep their workers on the payroll, despite the fact that they may not have been able to operate normally.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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.
The ERC is able to provide significant financial support for businesses affected by the pandemic.It can help businesses to retain employees, pay for payroll, and invest in the future.
Why was ERC created?
The COVID-19 outbreak caused an economic slump that led many businesses, including small and large ones, to either lay off staff or shut down.The ERC is designed to help keep businesses open and their employees working so that they can resume normal operations as soon as the pandemic subsides.
Benefits of the ERC
The ERC is a great way to boost the finances of businesses affected by pandemics.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC can be claimed by businesses even if no taxes are 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 Fiscal Year
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.
The ERC is estimated to have saved over 10 million jobs and prevented hundreds of thousands of businesses from closing their doors.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
The only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.In 2020, the business must have seen a decline of gross receipts by at least 50% in comparison to the same quarter the year before.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
Business can qualify in two ways for the ERC
- ERC eligibility for businesses suspended or suspended partially by a government.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- Significant decline in gross revenues: Businesses that have experienced a significant drop in gross revenue due to COVID-19 are also eligible for ERC.Significant declines in gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
Fully or partially suspended by a government order:
- ERC may be available for a restaurant that has to close because of a government directive.
- 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 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.This could mean that an employer can get a credit up to $5,000 for 2020.
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 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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Claim your Credit
How to Claim the ERC on Federal Employment Tax Returns
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 is applicable to any quarter during which the business qualifies for the credit.
Options for Claiming the ERC in Advance
Businesses have three options for claiming the 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.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.Businesses can do this by filing Form 941 and indicating how much they will reduce their quarterly employment tax deposits.
- Businesses can ask for a refund if they have already paid the employment tax. They should file Form 941-X at the IRS.
Calculating the Amount of the Credit 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.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.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 Documenation
Businesses must keep detailed records on all wages paid during 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 Fiscal Year
Here are a couple of tips to help you with your recordkeeping:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- 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 also call 1-800-829-1040 to get help from the IRS.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores which experienced a significant decrease in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality businesses
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- Businesses who were forced to operate with a reduced capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses that have experienced an increase in costs as a result 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 Fiscal Year
Here are some examples of how companies have used the ERC in specific situations:
- 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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- ERC was used by a manufacturer that could not operate at full capacity due to disruptions in the supply chain to keep employees employed and continue production of essential goods.
- 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.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, scammers try to take advantage businesses who qualify 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 warnings and red flags for identifying potential ERC fraudsters:
- They promise you will get a refund even if they don’t review your records.
- You will be charged high fees upfront, or a percentage of your refund.
- High-pressure sales tactics are used. Employee Retention Credit Fiscal Year
- They do not belong to an organization that is reputable.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you’re contacted by an ERC con artist, then you should report their activity to 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.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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Conclusion
In this article, the Employee Retention credit (ERC) is discussed. It’s a tax relief program that helps eligible employers retain their employees during the COVID-19 outbreak.We have outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
We have also provided some tips and resources for recordkeeping and documentation.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.If you qualify as an employer, please claim the ERC and get professional assistance if you require it.
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Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit Fiscal Year
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 is eligible for ERC funding?
Eligible business for the ERC includes those who suffered a significant reduction in gross receipts due to government order caused by COVID-19.
What are qualified wages?
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 ERCs by filing amended Forms 941 or 941-X at 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 repay my ERC?
No, it is a refundable credit.
Can I claim ERC even if I have received a PPP Loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim the ERC?
Yes, self-employed individuals are eligible for the ERC.
Self-employed individuals can claim the ERC on their Schedule C form.
Can nonprofit organizations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
Before you can get it, however, you must meet some additional requirements.
What are the common mistakes businesses make when they claim ERC?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Incorrect credit calculation
- Inclusion of all eligible wages
- Failure to amend form 941 – X on time.