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 can be claimed by businesses on the wages they paid employees who qualified during 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.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.
The Employee Retention CreditEmployee Retention Credit Lookback Period
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.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.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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 is able to provide significant financial support for businesses affected by the pandemic.It can help businesses retain their employees, cover payroll costs, and invest in their 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 was created to help businesses keep their employees on payroll so that they could quickly reopen and resume normal operations once the pandemic subsided.
Benefits of the ERC
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.The ERC can help businesses retain employees, which is crucial for a rapid 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 Lookback Period
Impact of the ERC on Businesses and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.The ERC also helped to keep businesses afloat through the economic storm.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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 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 a business will have to experience a significant decrease in gross revenues of at least 20 percent compared with the same quarter last year.
Two ways exist for businesses to qualify for the ERC:
- ERC for a business suspended fully or partly by a Government Order: An ERC can be awarded to a business that is suspended either completely or partially by an order of the government due COVID-19.This includes businesses who have been ordered closed, to operate at a lower capacity, or to 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 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
These examples and scenarios illustrate the criteria for each:
An order of the government may suspend all or part of a program.
- ERC can be claimed by a restaurant forced to shut down due to an order from the government.
- 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 is available to retail stores that experience a 50% drop in sales as a result of COVID-19.
- ERC is available to manufacturers who are unable to run at full capacity because of supply chain disruptions.
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.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.This means that a business could receive a credit of up to $5,000 per employee for 2020.
For the first three quarters of 2021, the credit is equal to 70% of qualified wages paid to employees, up to a maximum of $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.
Claim the Credit
How to Claim ERC on Federal Employment Tax Returns
For businesses to claim Employee Retention Credit on federal employment taxes, they must amend Form 941X – Adjusted Employer’s quarterly Federal Tax Return (or Claim for refund) – in order to do so, they will need to file Form 941X.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 can claim the ERC in three ways:
- Claim the credit ahead of time: Businesses may claim the credit by reducing the quarterly employment tax deposit.Businesses must submit Form 7200 to the IRS, Advance Payments of Employer Taxes and Credits.
- Reduce employment taxes deposits. Businesses are also able to reduce their quarterly employment tax deposits by the amount expected credit.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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
Multiplying qualified wages by the credit rate applicable, the ERC can be calculated.Credit rates are 50% in 2020 and 70% during the first three-quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.Businesses can’t, for instance, claim ERC wages if they also claim Paid Family Leave Credit (PFML) or Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should keep detailed records of all qualified wages paid to employees during the ERC period.This will allow businesses to calculate accurately the amount of credit they are entitled to and support their claim in the event that it is audited. Employee Retention Credit Lookback Period
Here are a few tips for documenting and keeping records:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of every employee’s hours, including sick time, holiday, and vacation.
- Keep track of all wages paid to employees, including base wages, bonuses, and overtime pay.
- Keep track of all government orders that affect your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can also call 1-800-829-1040 to get help from the IRS.
Examples of Eligible Businesses
The Employee Retention Credit (ERC) is available to businesses that have been impacted by the COVID-19 pandemic.Here are some businesses that could be eligible for Employee Retention Credit.
- Government orders force restaurants to close
- Retail stores that saw a significant fall in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Nonprofit organizations that saw their donations decline
- Hotels and hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons, 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 who experienced higher costs due to COVID-19
ERCs may be awarded to any business, including those that were fully or partially closed by a government order and/or experienced a significant decrease in gross receipts because of COVID-19. Employee Retention Credit Lookback Period
Here are a few examples of specific ways businesses have used their ERC:
- A restaurant, which was forced to close due to an order from the government for a period of several months, was able use the ERC in order to keep their 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 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 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.
If you are an owner of a business and are unsure as to whether you are eligible for ERC, then I would encourage you contact a tax specialist.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, some scammers take advantage of companies that qualify for the Employee Retention Credit.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
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They will refund you without looking at your records.
- They charge you high upfront fees or a certain percentage of your refund.
- They use high-pressure sales tactics. Employee Retention Credit Lookback Period
- They are not affiliated with a reputable tax professional organization.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.You can report this activity by calling 1-800-829-1040.
Protecting personal information and financial data is equally important.You should not provide your personal information to anyone contacting you uninvited.If you’re not sure if a company is legit or not, you should check reviews online. You can also contact the IRS.
This article has discussed the Employee retention credit (ERC), which is a tax relief that allows eligible employers to keep their employees employed during the COVID-19 Pandemic.We have discussed eligibility requirements, claiming processes, and possible scams related the ERC.
We have also provided tips and resources on 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.
Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit Lookback Period
What is ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
This credit is equal to 50% the wages paid by employees to qualified employees in 2020. And 70% of the wages paid by employees to qualified employees in their first three quarters in 2021.
Who is eligible to apply for ERC?
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 is a qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
Employer-paid health insurance premiums also qualify as wages.
How do I claim ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.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 even if I have received a PPP Loan?
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 individuals claim the ERC?
Yes, the ERC is available to self-employed people.
Self-employed individuals can claim the ERC on their Schedule C form.
Can nonprofit organizations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies that own a foreign affiliate claim ERCs?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
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.
- Credit calculation error
- The failure to include all qualifying wages
- Failure to amend Forms 901-X by deadline