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.Employee Retention Bonus (ERB) is a way to keep businesses afloat.
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.
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.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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Employee Retention CreditEmployee Retention Credit Statute
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 in March of 2020 by the Coronavirus Aid, Relief, and Economic Security Act to help employers keep their workers on the payroll, despite the fact that they may not have been able to operate normally.
The ERC is available to businesses of all sizes, including tax-exempt organizations.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.
The ERC provides a financial boost for businesses that are affected by pandemic.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC formed?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
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 can be claimed by businesses even if no taxes are due.Businesses can also claim ERC for wages paid by employers to employees who do not work due to COVID-19. Examples include employees who were furloughed and quarantined. Employee Retention Credit Statute
The Impact of the ERC in the Business and Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It also helped companies to weather the economic storm and remain afloat.
The ERC is estimated to have saved over 10 million jobs and prevented hundreds of thousands of businesses from closing their doors.It also contributed to the recovery of the economy by increasing consumer spending, and investing.
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Eligibility
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, an organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
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 that are required to close down, operate with a reduced capacity or adhere to certain restrictions can be eligible for the ERC.
- Significant decline of gross receipts. A business which has seen a significant fall in its gross receipts because of COVID-19, is also eligible to receive the ERC.Significant declines in revenue are defined as a decrease of at minimum 50% in 2020 quarters or at most 20% in 2021 quarters compared to same quarters the year before.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the 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.
- 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 can be awarded to a retail store that has experienced a 50% decrease in sales because of COVID-19.
- 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 credit (ERC), a tax-credit that businesses can claim, is for wages paid to qualified employees during the COVID-19 epidemic.The amount of the credit varies depending on the quarter and the number of employees a business has.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.This means a company could receive up to a $5,000 credit per employee in 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.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 your Credit
How to Claim 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 may be used for any quarter that the business is eligible for the credit.
Claim the ERC by Claiming it in Advance
Businesses can claim the ERC in three ways:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.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 reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- 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
The ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.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.Businesses cannot, for example, claim the ERC on wages they also claim as part of the Paid Family Medical Leave Credit and the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.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 Statute
Here are some tips on recordkeeping and documentation.
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Keep track of all the wages that employees receive, including overtime, bonuses, and base wages.
- Keep track of government orders affecting your business.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can contact the IRS 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 forced to shut down due to government order
- Retail stores which experienced a significant decrease in sales
- Supply chain disruptions prevent manufacturers from operating at full capacity
- Donations for nonprofit organizations are down
- Hotels and other hospitality businesses
- Travel and tourism companies
- Entertainment and Event Businesses
- Personal care businesses
- Fitness studios and gyms
- Salons and spas
- Retail stores selling non essential goods
- Businesses required to operate under reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Businesses that have experienced an increase in costs as a result COVID-19
ERCs may be awarded to any business, including those that were fully or partially closed by a government order and/or experienced a significant decrease in gross receipts because of COVID-19. Employee Retention Credit Statute
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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- ERC can be used by a producer who is unable operate at maximum capacity due to disruptions of the supply chain. This allows them to keep their employees and continue producing essential products.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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
Unfortunately, scammers try to take advantage businesses who qualify for the Employee Retention Credit.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.
Red Flags and Warning Signs
These warning signs will help you identify possible ERC scammers.
- They promise you will get a refund even if they don’t review your records.
- They charge you high upfront fees or a certain percentage of your refund.
- The salespeople are aggressive and use high-pressure tactics. Employee Retention Credit Statute
- They are not affiliated with a reputable tax professional organization.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Activity and Protecting Personal Data
You should contact the IRS if you receive a call from an ERC scammer.You can call 1-800-829-1040 for more information or go to the IRS web site.
You should also be careful to protect your personal and financial information.Don’t give out your personal details to anyone who contacts without asking.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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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 also have some tips and materials for documenting your 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.We encourage eligible employers to claim this credit and, if necessary, seek professional help.
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Employee Retention Credit: Frequently Asked Questions
Employee Retention Credit Statute
What is the ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
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 businesses for the ERC include those who experienced a significant decline in gross receipts or were fully or partially suspended due to government orders caused by the COVID-19 pandemic.
What are qualified wages?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
Employer-paid health insurance premiums also qualify as wages.
How can I claim my ERC?
The IRS will accept amended Forms 941 and 941-X from businesses to claim the ERC.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I need to repay the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC even if I have received a PPP Loan?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self employed individuals claim ERC benefits?
Yes, self-employed individuals are eligible for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non profit organizations claim ERC?
Yes, organizations that are not for profit can qualify 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?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
That said, there are some additional requirements that must be met before they can claim it.
Are there mistakes that companies make in claiming ERCs?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Calculation error on credit
- Failure to include all qualified wages
- Failure to amend form 941 – X on time.