COVID-19, a pandemic that has affected businesses of all types and sizes, has forced many to either lay off staff or close their business.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 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.If you want to know more about the ERC or how to claim it visit the IRS’ website, consult a tax advisor or continue reading 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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Employee Retention CreditEmployee Retention Credit Real Estate
Employee Retention Tax Credit (ERC), also known as the Employee Retention Tax Credit, is a refundable tax credit that employers can claim for qualifying wages paid to their employees during COVID-19.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.
The ERC is available to businesses of all sizes, including tax-exempt organizations.To be eligible, a business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to a COVID-19-related government order.
The ERC is able to provide significant financial support for businesses affected by the pandemic.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC created?
The COVID-19 pandemic triggered a severe economic recession, forcing many companies to layoff their employees or close down.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.
Benefits of the ERC
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
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 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 Real Estate
Impact of ERCs on the Economy and Businesses
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It has also helped businesses to stay afloat and weather the economic storm.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.The ERC also contributed positively to the recovery in terms of consumer spending as well as investment.
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Eligibility
The Employee Retention Credit (ERC) is a tax credit available to businesses that have been impacted by the COVID-19 pandemic. To be eligible, a business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to a COVID-19-related government order.
The only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.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, 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 eligibility is based on whether the business has been suspended completely or in part due to COVID-19.This includes businesses who have been ordered closed, to operate at a lower capacity, or to follow certain restrictions.
- Significant drop in gross sales: A business experiencing a significant loss in gross sales due to COVID-19 can also apply for the ERC.A significant decline in gross receipts is defined as a decline of at least 50% in a quarter in 2020 or at least 20% in a quarter in 2021 compared to the same quarter in the previous year.
Examples and Scenarios
These examples and scenarios illustrate the criteria for each:
A government order can suspend a person’s rights in full or part
- 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 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 the credit is dependent on the business’s quarter and employees.
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.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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Claiming Credit
How to Claim ERC for Federal Employment Tax Returns
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 is applicable to any quarter during which the business qualifies for the credit.
Options for Claiming the ERC in Advance
Businesses can claim the ERC in three ways:
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly 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.Businesses can do this by filing Form 941 and indicating how much they will reduce their quarterly employment tax deposits.
- 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 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.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 must keep detailed records on all wages paid during the ERC.This will enable businesses to accurately determine the amount of credit that they are eligible for, and to back up their claim should it be audited. Employee Retention Credit Real Estate
Here are some tips for recordkeeping and documentation:
- Keep a record of all your payroll documents, such as W-2 forms and 941s.
- 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 any orders from the government that may affect your business.
The IRS provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Government orders force restaurants to close
- Retail stores which experienced a significant decrease in sales
- Disruptions in the supply chains prevent manufacturers from working at full capacity
- Donations of nonprofit organizations declined
- Hotels and other hospitality enterprises
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons, spas
- Retail stores selling non essential goods
- Businesses that have been required to operate in a reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Businesses that experienced increased costs due to COVID-19
In addition to these examples, any business that was fully or partially suspended by a government order or that experienced a significant decline in gross receipts due to COVID-19 may be eligible for the ERC. Employee Retention Credit Real Estate
Here are some specific examples of how businesses have used the ERC:
- 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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- 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.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.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
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).These scammers use aggressive marketing to convince businesses to subscribe to their services even if that business isn’t eligible for the Employee Retention Credit (ERC).
Red Flags and Warning Signs
There are warning signs that could indicate an ERC scammer.
- They promise to get you a refund without reviewing your records.
- They charge high upfront fees or a percentage of your refund.
- Sales tactics are high-pressure. Employee Retention Credit Real Estate
- They are not members of a reputable professional tax organization.
- Your personal or financial data is requested upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you are contacted by an ERC fraudster, you must report this 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.If you’re not sure if a company is legit or not, you should check reviews online. You can also 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.The ERC has been explained in detail, including the eligibility requirements and the claim process.
We have also provided tips and resources on recordkeeping and documentation.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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Frequently Asked Questions about Employee Retention Credits
Employee Retention Credit Real Estate
What is the ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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?
Eligible companies for the ERC are those businesses that experienced a significant fall in gross sales or were partially or completely suspended because of government orders triggered by the COVID-19 outbreak.
What is a qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
The employer’s health insurance premiums are also included in the calculation of wages.
How can I claim my ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended form 941-X is required to be filed within 3 years from the date that the original Form 941 has been filed.
Do I have to pay back the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC if I received a loan from PPP?
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, self-employed individuals are eligible for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can nonprofit organizations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies that own a foreign affiliate claim ERCs?
Yes, employers can claim ERC when they pay wages to foreign employees.
Before you can get it, however, you must meet some additional requirements.
Are there common mistakes that businesses make when claiming ERC to watch out for?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Credit calculation error
- Inclusion of all eligible wages
- Failing to amend Forms 941-X within the specified timeframe.