The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.Employee Retention Bonus (ERB) is a way to keep businesses 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 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.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.
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The Employee Retention CreditEmployee Retention Credit Pros And Cons
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 created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 to help businesses keep their employees on the payroll, even if they were unable to operate normally.
ERC is open to businesses and organizations of all sizes.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 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC was established to assist businesses in keeping their employees employed so they can quickly reopen, resume normal operations and regain control of the situation once the pandemic has subsided.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can also assist businesses in retaining their employees. This is vital for a fast 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 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 Pros And Cons
The Impact of the ERC in the Business and Economy
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.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.It has also contributed to the economic recovery by boosting consumer spending and investment.
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Eligibility
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 decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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, an organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
Business Qualifications
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.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- 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
Here are some examples and scenarios to illustrate each eligibility criterion:
Orders from the government can be used to suspend or fully suspend your work.
- ERC may be available for a restaurant that has to close because of a government directive.
- 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 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 Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The credit amount varies according to the quarter and number of employees of a business.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.For 2020, a business may receive a maximum credit of $5,000 per employee.
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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Claim the Credit
How to Claim the ERC when Filing 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 can be submitted for any quarter where the business was entitled to the 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.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- 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 Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Businesses should avoid double-dipping on other relief programs.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 detailing all qualified wages paid by employers to employees over the ERC.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 Pros And Cons
Here are a few tips for documenting and keeping records:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- 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 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 contact the IRS for assistance by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses that have been affected by the COVID-19 Pandemic can apply for the Employee Retention Credit.Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores that experienced a significant decline in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Nonprofit organizations that saw their donations decline
- Hotels and other hospitality businesses
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- Salons and spas
- Retail stores selling non-essential goods
- Businesses who were forced to operate with a reduced capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses that have experienced an increase in costs as a result 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 Pros And Cons
Here are some specific examples of how businesses have used 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 store which experienced a drop of 50% in sales due COVID-19 could offset its payroll expenses by using the ERC.
- A manufacturer that was unable to operate at full capacity due to supply chain disruptions was able to use the ERC to keep its employees on payroll and continue to produce essential goods.
- 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.You can get help from a tax professional to determine your eligibility for the ERC and claim it if 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 can use aggressive marketing strategies to convince companies to sign-up for their services even when they are not eligible to receive the ERC.
Warning Signs and Red Flags
Here are some warning signals and red flags that can help you to identify ERC scammers.
- They will refund you without looking at your records.
- They charge high fees upfront or take a portion of your refund.
- High-pressure sales tactics are used. Employee Retention Credit Pros And Cons
- They are not affiliated to a reputable organization of tax professionals.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting personal information and financial data is equally 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, we have discussed the Employee Retention Credit (ERC), a tax relief program that helps eligible employers keep their employees on payroll 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’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 Credit Frequently Asked Questions:
Employee Retention Credit Pros And Cons
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 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?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
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 Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I have to repay my ERC?
No, the ERC is a refundable tax credit, which means that businesses do not need to repay it.
Can I claim ERC even if I have received a PPP Loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
Businesses cannot claim ERCs for wages they also claimed as PPPs.
Can self-employed people claim the ERC?
Yes, you can get the ERC if you are a self-employed individual.
Schedule C forms can be claimed by individuals who are self-employed.
Can non profit 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 own a foreign affiliate claim ERCs?
Businesses can claim ERC for the wages they pay to foreign-based employees.
There are a few additional requirements to meet before you can claim the benefit.
What are the common mistakes businesses make when they claim ERC?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- Incorrect credit calculation
- All wages are not included
- Failure to amend Form 941-X on time.