The COVID-19 virus has wreaked havoc across all businesses, forcing some to shut their doors or layoff employees.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.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
If you are a business owner who has been impacted by the pandemic, the ERC can help you keep your employees on board and your business afloat.To find out more about ERC and to claim, you can either visit the IRS web site, speak with an advisor, or check 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 Qualifying Quarters
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 are available to all businesses, even tax-exempt ones.To be eligible for the ERC, a company must have had a significant fall in gross receipts and/or have been fully or partial suspended as a result of an COVID-19 government order.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can assist businesses in retaining their employees, covering payroll costs, as well as investing in their future.
Why was ERC formed?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
ERCs can give businesses impacted by pandemics a financial boost.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 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 Qualifying Quarters
Impact of ERC on Business and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.The ERC also helped to keep businesses afloat through 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
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 primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.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 will have to experience a significant decrease in gross revenues of at least 20 percent compared with the same quarter last year.
Business Qualifications
The ERC is available to businesses in two different 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 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
Below are examples and scenarios that illustrate each of the eligibility criteria:
Full or partial suspension by 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 eligibility is for a manufacturer who is not able to operate at maximum capacity due to disruptions in the supply chain.
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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 credit amount varies according to the quarter and number of employees of a business.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This could mean that an employer can get a credit up to $5,000 for 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 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 in Federal Employment Taxreturn
For businesses to claim Employee Retention Credit on federal employment taxes, they must amend Form 941X – Adjusted Employer’s quarterly Federal Tax Return (or Claim for refund) – in order to do so, they will need to file Form 941X.This form can also be filed for any other quarters in which a business may have been eligible for credit.
Options for Claiming the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim the credit in advance: Businesses can claim the credit in advance by reducing their quarterly employment tax deposits.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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
The ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
Businesses should avoid double-dipping on other relief programs.For example, businesses cannot claim the ERC for wages that are also used to claim the Paid Family and Medical Leave Credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Keep detailed records for all wages that were paid to employees in the ERC period.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 Qualifying Quarters
Here are a few tips for documenting and keeping records:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- Track all employee wages, including bonuses, overtime, and base pay.
- 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 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.Here are some businesses that could be eligible for Employee Retention Credit.
- Restaurants forced to close due to government orders
- Retail stores which experienced a significant decrease 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 hospitality businesses
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Gyms & fitness studios
- Salons and spas
- Retail stores selling non essential goods
- Businesses that had to operate on a lower capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses who experienced higher costs due to 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 Qualifying Quarters
Below are some specific examples on how businesses have utilized 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 outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- ERC was used by a manufacturer that could not operate at full capacity due to disruptions in the supply chain to keep employees employed and continue production of essential goods.
- An organization that had seen its donations drop due to COVID-19 could use the ERC in order to keep their employees on the payroll and continue to offer 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
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).Scammers will use aggressive marketing techniques to get businesses to sign up, even if they are not eligible for ERC.
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- They guarantee to refund your money without looking into your records.
- They charge high upfront fees or a percentage of your refund.
- High-pressure sales tactics are used. Employee Retention Credit Qualifying Quarters
- They are not members of a reputable professional tax organization.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you’re contacted by an ERC con artist, then you should report their activity to IRS.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
You should also be careful to protect your personal and financial information.Do not share your personal data with anyone who contacts uninvited.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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Conclusion
We have covered the Employees Retention (ERC) Credit in this article. This is a tax credit program that helps employers who qualify to retain their staff during the COVID-19 pandemic.We have discussed the ERC eligibility requirements, claim process and potential scams.
We have also provided some tips and resources for recordkeeping and documentation.The ERC provides a valuable incentive that helps employers to reduce their payroll tax liability, improve the cash flow of their business, and provide support for their employees.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Employee Retention Credit Frequently Asked Questions:
Employee Retention Credit Qualifying Quarters
What is ERC?
This is a tax credit that can be refunded to businesses who were affected by the COVID-19 Pandemic.
This credit equals 50% of the qualified wages that employees received in 2020, and 70% of the qualified wages they receive in the first quarter of 2021.
Who is eligible for ERC funding?
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 is a qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim 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 ERC if I received a loan from PPP?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses can’t claim ERC on wages they used for PPP loans.
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, nonprofits are eligible 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.
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:
- Wrong calculation on credit
- Inclusion of all eligible wages
- Failing to amend Forms 941-X within the specified timeframe.