The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.It’s designed to help employers keep their employees, even if the business is unable to function normally.
The ERC can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay afloat.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 Penalty Relief
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.It was created as part of the Coronavirus Aid, Relief, and Economic Security Act, in March 2020, to help companies keep their employees, despite being unable operate normally.
ERCs are available to all businesses, even tax-exempt ones.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.
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 the 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 is designed to help keep businesses open and their employees working so that they can resume normal operations as soon as the pandemic subsides.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.Businesses can claim ERC for qualified wages paid to employees not working as a result of COVID-19. For example, employees are furloughed from work or quarantined. Employee Retention Credit Penalty Relief
Impact of ERC on Businesses and the Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It also helped businesses weather the storm and stay afloat.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.The ERC also contributed positively to the recovery in terms of consumer spending as well as 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’s gross receipts must have declined by at least 50% from the same quarterly period of the previous 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.
Business Qualifications
The ERC is available to businesses in two different ways.
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- 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 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
The following are some scenarios and examples that will help you understand each eligibility criteria.
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.
- 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.
- A manufacturer that is unable to operate at full capacity due to supply chain disruptions is eligible for the ERC.
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Credit Amount
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 amount varies depending on how many employees are employed and what quarter it is.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This means that a business could receive a credit of up to $5,000 per employee for 2020.
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 that a business could receive a credit of up to $7,000 per employee per quarter for the first three quarters of 2021, for a total of up to $21,000 per employee for the year.
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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 may be used for any quarter that the business is eligible for the credit.
Claim the ERC in Advance
Businesses have three options for claiming the ERC:
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- 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 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
Multiplying the amount of ERC by the credit rate is how the ERC amount is calculated.Credit rates are 50% in 2020 and 70% during the first three-quarters of 2021.
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 Documentation
Businesses should keep detailed records detailing all qualified wages paid by employers to employees over 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 Penalty Relief
Here are a couple of tips to help you with your recordkeeping:
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime pay.
- Keep track of government orders affecting your business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can contact IRS for help 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.Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants closed due to government orders
- Retail shops that have experienced a substantial decline in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and hospitality businesses
- Travel and tourism businesses
- Entertainment and event business
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- Businesses who were forced to operate with a reduced capacity
- Businesses forced to comply with new safety protocols
- Costs incurred by businesses as a result of COVID-19
Aside from these examples, businesses that have been fully or partly suspended by a government directive or who have experienced a significant drop in gross receipts as a result of COVID-19 are also eligible for ERC. Employee Retention Credit Penalty Relief
Here are some examples of how companies have used the ERC in specific situations:
- 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.
- A retail outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their 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 own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.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, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (ERC).These scammers may use aggressive marketing tactics to try to convince businesses to sign up for their services, even if the business is not eligible for the ERC.
Red Flags and Warning Signs
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They promise to get you a refund without reviewing your records.
- You will be charged high fees upfront, or a percentage of your refund.
- High-pressure sales tactics are used. Employee Retention Credit Penalty Relief
- They are not affiliated to a reputable organization of tax professionals.
- Your personal or financial data is requested upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can report this activity by calling 1-800-829-1040.
Protecting your financial and personal information is also important.Do not give your personal information to anyone who contacts you unsolicited.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 discussed the ERC eligibility requirements, claim process and potential scams.
We’ve also included some resources and advice on recordkeeping.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support 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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Employee Retention Bonus Frequently Answered Questions
Employee Retention Credit Penalty Relief
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
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 apply for the ERC program?
Eligible business for the ERC includes those who suffered a significant reduction in gross receipts due to government order caused by COVID-19.
What is qualified wage?
Wages, salaries, tips, and bonuses are all included in the definition of a qualified wage.
Health insurance premiums paid by the employer are also considered qualified wages.
How can I claim my 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 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?
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.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non-profit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
Before you can get it, however, you must meet some additional requirements.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
When claiming your ERC; businesses must be aware of the following mistakes:
- Incorrect credit calculation
- All wages are not included
- Failure to amend form 941 – X on time.