The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to employees during the pandemic.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
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.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.
The Employee Retention CreditEmployee Retention Credit Nonprofit Gross Receipts
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 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.
ERCs can be obtained by businesses of any size, including those exempt from tax.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was the ERC created?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.Businesses can also claim the ERC for qualified wages paid to employees who are not working due to COVID-19, such as employees who are furloughed or quarantined. Employee Retention Credit Nonprofit Gross Receipts
Impact of the ERC on Businesses and the Economy
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.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
The only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.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, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
There are two ways that businesses can qualify for ERC:
- ERC eligibility for businesses suspended or suspended partially by a government.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- Significant decline in Gross Receipts: An eligible business who has suffered a significant decrease in gross receipts as a result of COVID-19 may also be 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
You can use the following examples to demonstrate each eligibility criterion.
A government order can suspend a person’s rights in full or part
- ERC can be claimed by a restaurant forced to shut down due to an order from the government.
- 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.
- ERCs are available for manufacturers that cannot operate at their full capacity as a result of disruptions in supply chains.
Employee Retention (ERC) Credit is an income tax credit which businesses can claim in relation to wages that were paid during the COVID-19 Pandemic.The credit amount varies according to the quarter and number of employees of a business.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.A business can receive up to $5,000 in credit per employee for the year 2020.
For the three first quarters of the year 2021, the credit is equal to 70% of the wages qualified to be paid. There is a limit of $10,000 per employee per quarter.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.
Claim the Credit
How to Claim the ERC on 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 may be used for any quarter that the business is eligible for the credit.
Claim the ERC by Claiming it in Advance
Businesses have three options for claiming the ERC:
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.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.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 that have already paid their employment taxes can request a refund of the credit by filing Form 941-X with the IRS.
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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should avoid double-dipping on 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 must keep detailed records on all wages paid 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 Nonprofit Gross Receipts
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 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.
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.
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.
- Government orders force restaurants to close
- Retail shops that have experienced a substantial decline 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 and fitness studios
- Salons, spas
- Retail stores selling non essential goods
- Businesses that have been required to operate in a reduced capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses that experienced increased 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 Nonprofit Gross Receipts
Here are some examples of how companies have used the ERC in specific situations:
- 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.
- 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 allows a company to maintain its workforce and produce essential products despite being unable to run at full capacity.
- 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 are a business owner and you are unsure whether or not you are eligible for the ERC, I encourage you to contact a tax professional.They can help determine your eligibility as well as claim the credit for you if you’re eligible.
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).These scammers can use aggressive marketing strategies to convince companies to sign-up for their services even when they are not eligible to receive the ERC.
Red Flags and Warning Signs
There are warning signs that could indicate an ERC scammer.
- They promise you will get a refund even if they don’t review your records.
- The fees are high, or they take a large percentage of the refund.
- High-pressure sales tactics are used. Employee Retention Credit Nonprofit Gross Receipts
- They aren’t affiliated with an established tax professional association.
- 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.
Protecting your financial and personal information is also important.Don’t give out your personal details to anyone who contacts without asking.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.
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 explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
Also, we have provided some resources and tips for documenting and keeping records.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.If you’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
Employee Retention Bonus Frequently Answered Questions
Employee Retention Credit Nonprofit Gross Receipts
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
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 can receive the 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?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Employer-paid health insurance premiums also qualify as wages.
How do you claim your ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I need to repay the ERC?
The ERC does not require repayment by businesses. It is a tax credit that can be used to offset future taxes.
Can I claim ERC if I received a loan from PPP?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self-employed people claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can nonprofit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
It is important to note that there are additional requirements for claiming the tax credit.
Are there common mistakes that businesses make when claiming ERC to watch out for?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- The credit calculation is incorrect
- Inclusion of all eligible wages
- Failure to amend Form 941-X on time.