The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
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.
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 Qualified Wages
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 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 are available to all businesses, even tax-exempt ones.To qualify, the business must have seen a significant reduction in gross sales or be suspended fully or partly due to an order from the government related to COVID-19.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC formed?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.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 help businesses retain their employees, which is essential for a quick recovery.
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 Qualified Wages
Impact of ERCs on the Economy and Businesses
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.It has also helped businesses to stay afloat and weather the economic storm.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.It also contributed to the recovery of the economy by increasing consumer spending, and investing.
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Eligibility
The only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.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
There are two ways that businesses can qualify for ERC:
- Fully or partially suspended by a government order: A business that has been fully or partially suspended by a government order due to COVID-19 is eligible for the ERC.Businesses that are required to close down, operate with a reduced capacity or adhere to certain restrictions can be eligible for the ERC.
- Significant decline in gross receipts: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.Significant decline in Gross Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
Examples and Scenarios
The following are some scenarios and examples that will help you understand each eligibility criteria.
Fully or partially suspended by a government order:
- ERC may be available for a restaurant that has to close because of a government directive.
- 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:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- ERC is available to manufacturers who are unable to run at full capacity because of supply chain disruptions.
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Credit Amount
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 of credit depends on the number of employees and the quarter.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.This could mean that an employer can get a credit up to $5,000 for 2020.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.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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Claiming 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 can be submitted for any quarter where the business was entitled to 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.To do this, businesses must file Form 7200, Advance Payment of Employer Credits and Taxes, with the IRS.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.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 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
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rates for 2020 are 50% and 70% in the first 3 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 Documenation
Keep detailed records for all wages that were paid to employees in 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 Qualified Wages
Here are some helpful tips on documenting your records and documents:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of all the hours worked by your employees including holidays, sick days, and vacations.
- Keep track of all the wages that employees receive, including overtime, bonuses, and base wages.
- Keep track of any orders from the government that may affect your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can call the IRS at 1-800-829-1040 for assistance.
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Examples of Eligible Businesses
Businesses that are affected by COVID-19 can receive the Employee Retention (ERC).Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail shops that have experienced a substantial decline in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Donations to nonprofit organizations have declined
- Hotels and other hospitality business
- 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 that had to operate on a lower capacity
- Businesses that are forced to implement new safety protocols
- Costs incurred by businesses as a result of COVID-19
The ERC may also be available to businesses that were suspended or partially by government orders or experienced a substantial decline in gross revenues due to COVID-19. Employee Retention Credit Qualified Wages
Here are some examples that show how businesses have used ERCs:
- A restaurant that was forced to close for several months due to a government order was able to use the ERC to keep its 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.
- 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 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.
You should contact a professional tax advisor if, as a small business owner, you have any doubts about your eligibility for the ERC.They can help determine your eligibility as well as claim the credit for you if you’re eligible.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Scammers are targeting businesses eligible for the Employee Retention Credit.These scammers might use aggressive advertising tactics to convince businesses that they should sign up for their service, even though the business may not be eligible for 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.
- You will be charged high fees upfront, or a percentage of your refund.
- These salespeople use high-pressure tactics. Employee Retention Credit Qualified Wages
- They do not belong to an organization that is reputable.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
You should contact the IRS if you receive a call from an ERC scammer.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
Protecting personal information and financial data is equally important.You should not provide your personal information to anyone contacting you uninvited.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 discussed eligibility requirements, claiming processes, and possible scams related the ERC.
Also, we have provided some resources and tips for documenting and keeping records.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support their employees.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit Qualified Wages
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?
Businesses that have experienced a significant drop in gross receipts or those that were suspended or fully suspended by government orders due to the COVID-19 epidemic are eligible for the ERC.
What are qualified wages?
Included in qualifying wages are wages, salaries, and tips paid to employees.
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 need to repay the ERC?
No, the ERC is a refundable tax credit, which means that businesses do not need to repay it.
Can I claim ERC if I received a loan from PPP?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim the ERC?
Self-employed individuals can apply for the ERC.
Self-employed individuals can claim the ERC on their Schedule C form.
Can non profit organizations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies with a foreign subsidiary claim ERC?
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.
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:
- Wrong calculation on credit
- Failure to include all qualified wages
- Failure to amend form 941 – X on time.