The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their 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 is designed to help businesses keep their employees on payroll, even if they are unable to operate normally.
The ERC is a great way to keep your employees engaged and your business running smoothly if you’re a business owner impacted by the pandemic.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.
The Employee Retention CreditEmployee Retention Credit Webinars
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid during the COVID-19 pandemic.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.
ERCs can be obtained by businesses of any size, including those exempt from tax.For a business to be eligible, it must have suffered a significant decrease in gross revenues or been partially or completely suspended by a government order related to COVID-19.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC created
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.
The ERC is a great way to boost the finances of businesses affected by pandemics.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 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 Webinars
Impact of ERCs on the Economy and Businesses
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.The ERC also helped to keep businesses afloat through the economic storm.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.The ERC also contributed positively to the recovery in terms of consumer spending as well as investment.
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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 an enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period in the previous year.
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.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 revenues: Businesses that have experienced a significant drop in gross revenue due to COVID-19 are also eligible for 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
The following are some scenarios and examples that will help you understand each eligibility criteria.
Fully or partially suspended by a government order:
- ERC is available to restaurants that are forced to close by a government order.
- A gym that is required to operate at a reduced capacity due to a COVID-19-related government order is eligible for the ERC.
Significant decline in gross receipts:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- ERC eligibility is for a manufacturer who is not able to operate at maximum capacity due to disruptions in the supply chain.
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 is dependent on the business’s quarter and employees.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.For 2020, a business may receive a maximum credit of $5,000 per employee.
For the first three quarters of 2021, the credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per quarter per employee.For the first three-quarters of 2021, a business can receive up to $7,000 in credit per employee. This could amount to up to $21,000 for each employee.
Claim the 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 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 it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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 Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
Multiplying qualified wages by the credit rate applicable, the ERC can be calculated.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 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 enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Employee Retention Credit Webinars
Here are a couple of tips to help you with your recordkeeping:
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime pay.
- Keep track of any orders from the government that may affect your business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can also call 1-800-829-1040 to get help from the IRS.
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.
- Government orders force restaurants to close
- 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 for nonprofit organizations are down
- Hotels and other hospitality business
- Travel and tourism businesses
- Entertainment and Event Businesses
- Personal care businesses
- Fitness studios and gyms
- Salons and spas
- Retail stores that sell non-essential products
- Businesses that had to operate on a lower capacity
- Businesses forced to adopt new safety protocols and measures
- Costs incurred by businesses as a result of 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 Webinars
Here are a few examples of specific ways businesses have used their ERC:
- The ERC allowed a restaurant to retain its staff after it was forced to shut down for several months by government order.
- The ERC was used by a retail store to offset payroll costs after it experienced a 50% drop in sales as a result of COVID-19.
- The ERC allowed a manufacturer who was not able to operate at its full capacity because of supply chain disruptions to continue producing essential goods and keep their employees on the payroll.
- 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 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 you to determine your eligibility and to claim the credit if you are eligible.
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (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
These warning signs will help you identify possible ERC scammers.
- The company promises to give you a full refund without reviewing any of your records.
- They charge high upfront fees or a percentage of your refund.
- They use high-pressure sales tactics. Employee Retention Credit Webinars
- They do not belong to an organization that is reputable.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can report this activity by calling 1-800-829-1040.
It is important to safeguard your personal and financial data.Never give out personal information to someone who contacts you without your permission.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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.The ERC has been explained in detail, including the eligibility requirements and the claim process.
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.
Employee Retention Credit: Frequently Asked Questions
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What is 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 is eligible to apply for ERC?
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 is qualified wage?
Salary, wages, bonuses, and tips are all considered to be wages.
Also, health insurance premiums that employers pay are considered wages.
How do I claim the ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I have to pay back the ERC?
The ERC is not a tax credit that needs to be repaid.
Can I claim ERC even if I have received a PPP Loan?
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 people claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can non-profit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofit organizations may claim the ERC by submitting Form 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.
It is important to note that there are additional requirements for claiming the tax credit.
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.
- Calculation error on credit
- All wages are not included
- Failure to amend Forms 901-X by deadline