The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.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.
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.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 K-1
Employee Retention Tax Credit (ERC), also known as the Employee Retention Tax Credit, is a refundable tax credit that employers can claim for qualifying wages paid to their employees during COVID-19.It was established by the Coronavirus Aid, Relief, and Economic Security Act in March 2020 in order to help businesses retain their employees, even if it meant they could not operate normally.
The ERC is available to businesses of all sizes, including tax-exempt organizations.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 provides a financial boost for businesses that are affected by pandemic.It can assist businesses in retaining their employees, covering payroll costs, as well as investing 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
ERCs can give businesses impacted by pandemics a financial boost.It can also help businesses retain their employees, which is essential for a quick recovery.
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 also claim ERC for wages paid by employers to employees who do not work due to COVID-19. Examples include employees who were furloughed and quarantined. Employee Retention Credit K-1
Impact of ERC on Business and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped businesses weather the storm and stay afloat.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting 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 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, the business must have suffered from a significant fall in gross sales of at least 20% when compared to same quarter in previous year.
Business Qualifications
Business can qualify in two ways for the ERC
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- 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
You can use the following examples to demonstrate each eligibility criterion.
Fully or partially suspended by a government order:
- ERC is available to restaurants that are forced to close by a government order.
- 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 is available to retail stores that experience a 50% drop in sales as a result 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
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 credit depends on the number of employees and the quarter.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.This means a company could receive up to a $5,000 credit per employee in 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.For the first 3 quarters in 2021, an employer could receive up to $7,000 per employee each quarter. That’s up $21,000 per worker for the whole year.
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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 also be filed for any other quarters in which a business may have been eligible for credit.
Options for Claiming the ERC in Advance
Businesses have three choices for claiming ERCs:
- 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.
- 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.
- Businesses that already pay their employment taxes to the IRS can request a reimbursement of the credit. To do this, they must file 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 is 50% for 2020 and 70% for the first three quarters of 2021.
Avoid double-dipping when it comes to other relief programs.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 Documentation
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Employee Retention Credit K-1
Here are a couple of tips to help you with your recordkeeping:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of all the hours worked by your employees including holidays, sick days, and vacations.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- Keep track of any government orders that affected the business’s operations.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can also contact the IRS for assistance 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 which experienced a significant decrease in sales
- Disruptions in the supply chains prevent manufacturers from working at full capacity
- Donations of nonprofit organizations declined
- Hotels and hospitality businesses
- Travel and Tourism Businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms, fitness studios
- Salons, spas
- Retail stores that sell non-essential products
- Businesses that had to operate on a lower capacity
- Businesses that are forced to implement new safety protocols
- Costs incurred by businesses as a result of COVID-19
In addition to these examples, any business that was fully or partially suspended by a government order or that experienced a significant decline in gross receipts due to COVID-19 may be eligible for the ERC. Employee Retention Credit K-1
Below are some specific examples on how businesses have utilized the 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 outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- 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 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.
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 you to determine your eligibility and to claim the credit if you are eligible.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, some scammers take advantage of companies that 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 guarantee to refund your money without looking into your records.
- The fees are high, or they take a large percentage of the refund.
- High-pressure sales tactics are used. Employee Retention Credit K-1
- They are not members of a reputable professional tax organization.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Actors and Protecting Your Personal Information
You should contact the IRS if you receive a call from an ERC scammer.You can call 1-800-829-1040 for more information or go to the IRS web site.
It is important to safeguard your personal and financial data.You should not provide your personal information to anyone contacting you uninvited.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 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 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’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
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Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit K-1
What is ERC?
This is a tax credit that can be refunded to businesses who were affected by the COVID-19 Pandemic.
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 receive the ERC?
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 a qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
Also, health insurance premiums that employers pay are considered 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, however, is a non-refundable tax credit.
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.
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Schedule C forms can be claimed by individuals who are self-employed.
Can non-profit organisations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary claim ERC?
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.
Are there common mistakes that businesses make when claiming ERC to watch out for?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- Incorrect credit calculation
- Failure to include all qualified wages
- Failure to amend Forms 901-X by deadline