COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their employees during the pandemic.The ERC is intended to keep employees employed, even when businesses are unable operate normally.
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.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 Overview
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages during the COVID-19 Pandemic.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.
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.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was ERC created?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.The ERC’s purpose was to keep employees on the payroll so that businesses could quickly reopen their doors and resume normal operation once the COVID-19 pandemic had subsided.
ERC Benefits
The ERC is a great way to boost the finances of businesses affected by pandemics.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 can claim the ERC on wages paid to employees that are not working because of COVID-19. This includes employees who have been furloughed, quarantined, or are otherwise not allowed to work. Employee Retention Credit Overview
Impact of the ERC on Businesses and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.It has also helped businesses to stay afloat and weather the economic storm.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.In 2020, a business must have experienced a significant decline in gross receipts of at least 50% compared to the same quarter in the previous 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
Businesses can qualify for the ERC in two ways:
- 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.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- Significant drop in gross sales: A business experiencing a significant loss in gross sales due to COVID-19 can also apply for the 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
Here are some examples and scenarios to illustrate each eligibility criterion:
Fully or partially suspended by a government order:
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- ERC eligibility is granted to a gym that must operate at a lower capacity as a result of a government order relating to COVID-19.
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
Employee Retention credit (ERC), a tax-credit that businesses can claim, is for wages paid to qualified employees during the COVID-19 epidemic.The amount of the credit is dependent on the business’s quarter and employees.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.For 2020, a business may receive a maximum credit of $5,000 per employee.
For the first quarters of 2021, the credit equals 70% of wages that are qualified. However, this is limited to $10,000 per quarter per employee.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 the Credit
How to Claim ERC on Federal Employment Tax Returns
To claim the Employee Retention Credit (ERC) on federal employment tax returns, businesses must file an amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.This form is applicable to any quarter during which the business qualifies 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.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- 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
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 should be careful to avoid double-dipping with 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 Documentation
Businesses should keep detailed records detailing all qualified wages paid by employers to employees over 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 Overview
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 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 government orders affecting your business.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can also call 1-800-829-1040 to get help from the IRS.
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Examples of Eligible Businesses
Businesses affected by the COVID-19 virus can claim an Employee Retention credit (ERC).These are some examples of businesses who may qualify for the 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 business
- Entertainment and Event Businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Retail stores selling non essential goods
- Businesses required to operate under reduced capacity
- Businesses forced to comply with 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 Overview
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.
- ERC allows a company to maintain its workforce and produce essential products despite being unable to run at full capacity.
- A nonprofit organization whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing 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.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (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
Here are some warnings and red flags for identifying potential ERC fraudsters:
- The company promises to give you a full refund without reviewing any of your records.
- They charge you high upfront fees or a certain percentage of your refund.
- High-pressure sales tactics are used. Employee Retention Credit Overview
- They are not members of a reputable professional tax organization.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC fraudster, you must report this activity to the IRS.You can call 1-800-829-1040 for more information or go to the IRS web site.
Protecting personal information and financial data is equally important.Never give out personal information to someone who contacts you without your permission.If you want to know if a particular business is legit, check online reviews. Or contact the IRS.
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Conclusion
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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
Also, we have provided some resources and tips for documenting and keeping records.ERCs are a valuable tool that employers can use to lower their employment tax liability and improve their cash flow. They also help support their workforce.If you qualify as an employer, please claim the ERC and get professional assistance if you require it.
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Employee Retention Credit: Frequently Asked Questions
Employee Retention Credit Overview
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 to 50% of qualified wages paid to employees in 2020 and 70% of qualified wages paid to employees in the first three quarters of 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 are qualified wages?
Salary, wages, bonuses, and tips are all considered to be wages.
Also, health insurance premiums that employers pay are considered wages.
How do I claim the ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I have to repay my ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim the ERC if I received a PPP loan?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed individuals claim 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 organizations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary 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?
When claiming your ERC; businesses must be aware of the following mistakes:
- Incorrect credit calculation
- Inclusion of all eligible wages
- The failure to amend Form 941-X in time.