COVID-19, a pandemic that has affected businesses of all types and sizes, has forced many to either lay off staff or close their business.Employee Retention (ERC) Credit is available to businesses that need it.
The ERC allows businesses to claim a tax credit on wages paid during a pandemic.It is designed to help businesses keep their employees on payroll, even if they are unable to operate normally.
The ERC may be able to help keep your employees and business afloat if your company has been impacted.For more information on the ERC and how to apply for it, you can visit the IRS site, talk with a professional 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 For Workers
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages during the COVID-19 Pandemic.The Coronavirus Aid, Relief, and Economic Security Act created the Employee Retention Credit (ERC) in March 2020. Its purpose is to assist businesses to keep their employees, even if the business is unable to function normally.
ERC is open to businesses and organizations of all sizes.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.
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC formed?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can also be used to retain staff, which is important for a swift recovery.
Businesses can claim the ERC even if they don’t owe taxes.Businesses may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. Employee Retention Credit For Workers
Impact of ERCs on the Economy and Businesses
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.It also helped companies to weather the economic storm and remain afloat.
The ERC is estimated to have saved over 10 million jobs and prevented hundreds of thousands of businesses from closing their doors.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.In 2020, an enterprise must have suffered a significant drop in gross receipts that is at least 50 percent less than the same period in the previous calendar 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
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 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 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
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- ERC is available to manufacturers who are unable to run at full capacity because of supply chain disruptions.
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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.
The credit for 2020 is equal 50% of the wages qualified to be paid to employees. This maximum can reach $10,000 per employee.This means that a business could receive a credit of up to $5,000 per employee for 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.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 for Federal Employment Tax Returns
Businesses that wish to claim the Employee Retention credit (ERC), on their federal employment tax returns must use Form 941-X, Revised Employer’s Quarterly Tax Return, or Claim for Refund.This form can also be filed for any other quarters in which a business may have been eligible for 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, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Reduce employment taxes deposits. Businesses are also able to reduce their quarterly employment tax deposits by the amount expected credit.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- Businesses who have already paid employment taxes may request a credit refund by filing IRS Form 941X.
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.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
Avoid double-dipping when it comes to 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 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 For Workers
Here are some tips on recordkeeping and documentation.
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track of every employee’s hours, including sick time, holiday, and vacation.
- Keep track of all the wages that employees receive, including overtime, bonuses, and base wages.
- Keep track of government orders affecting your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
The Employee Retention Credit (ERC) is available to businesses that have been impacted by the COVID-19 pandemic.Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants forced to close due to government orders
- 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
- Donations of nonprofit organizations declined
- Hotels and other hospitality businesses
- Travel and tourism businesses
- 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
- 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 For Workers
Here are a few examples of specific ways businesses have used their ERC:
- A restaurant that had to close its doors for several weeks due to government orders was able, with the ERC, to keep all of its employees employed.
- A retail store that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its payroll costs.
- 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 organization whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing essential services.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.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
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).Scammers will use aggressive marketing techniques to get businesses to sign up, even if they are not eligible for ERC.
Red Flags and Warning Signs
These warning signs will help you identify possible ERC scammers.
- The company promises to give you a full refund without reviewing any of your records.
- They charge high fees upfront or take a portion of your refund.
- High-pressure sales tactics are used. Employee Retention Credit For Workers
- They aren’t affiliated with an established tax professional association.
- Your personal or financial data is requested upfront.
Reporting Suspicious Activity and Protecting Personal Data
You should contact the IRS if you receive a call from an ERC scammer.You can report this activity by calling 1-800-829-1040.
You should also be careful to protect your personal and financial information.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 tips and resources on recordkeeping and documentation.The ERC provides a valuable incentive that helps employers to reduce their payroll tax liability, improve the cash flow of their business, and provide support for their employees.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Employee Retention Credit Frequently Asked Questions:
Employee Retention Credit For Workers
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
This credit is equal 50% of qualified wage paid to employees for 2020 and 70% qualified wage paid to employees during the first three-quarters of 2021.
Who can apply for the ERC program?
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 is qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.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 ERC if I received a loan from PPP?
You can still claim an ERC even though you received a loan through the Paycheck Protection Programme (PPP).
Businesses cannot claim ERCs for wages they also claimed as PPPs.
Can self-employed individuals claim ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed individuals can claim the ERC on their Schedule C form.
Can nonprofit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
There are a few additional requirements to meet before you can claim the benefit.
Are there mistakes that companies make in claiming ERCs?
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.