The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to 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 may be able to help keep your employees and business afloat if your company has been impacted.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 Tax Credit Filing Deadline
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 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.
ERCs can be obtained by businesses of any size, including those exempt from tax.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 be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was ERC created?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.The ERC was created to help businesses keep their employees on payroll so that they could quickly reopen and resume normal operations once the pandemic subsided.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.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 Tax Credit Filing Deadline
Impact of the ERC on Businesses and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped companies to weather the economic storm and remain afloat.
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.
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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 2020, a business must have experienced a significant decline in gross receipts of at least 50% compared to the same quarter in 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.
Business Qualifications
There are two ways that businesses can qualify for ERC:
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.The ERC is available to businesses that have been told to close or operate at reduced capacity.
- 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 gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Examples and Scenarios
You can use the following examples to demonstrate each eligibility criterion.
A government order can suspend a person’s rights in full or part
- ERC can be claimed by a restaurant forced to shut down due to an order from the government.
- 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 may be available for a retailer that suffers a drop of 50% in sales caused by COVID-19.
- ERCs are available for manufacturers that cannot operate at their full capacity as a result of disruptions in supply chains.
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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.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.This means a company could receive up to a $5,000 credit per employee in 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 Credit
How to Claim the ERC on Federal Employment Tax Returns
To claim the Employee-Retention Credit (ERC), businesses must file a Form 941-941-X, Adjusted Employer Quarterly Federal Tax return or Claim of Refund.This form may be used for any quarter that the business is eligible for the credit.
Claim the ERC in Advance
Businesses have three options to claim the ERC.
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.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.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- 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
Multiplying employee wages with the applicable credit rate will give you the ERC.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 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 Documenation
Keep detailed records for all wages that were paid to employees in the ERC period.This will assist businesses in accurately calculating the amount they are entitled for as well as supporting their claim if the IRS audits it. Employee Retention Tax Credit Filing Deadline
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 the hours that employees work, including sick leave, vacation time, and holidays.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- Keep track of all government orders that 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 contact IRS for help 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.Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores that saw a significant fall in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations to nonprofit organizations have declined
- Hotels and other hospitality businesses
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Gyms, fitness studios
- Salons and spas
- Retail shops selling non-essential items
- Businesses that had to operate on a lower capacity
- Businesses forced to comply with new safety protocols
- Businesses that experienced increased costs due to 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 Tax Credit Filing Deadline
Here are some examples that show how businesses have used ERCs:
- An employee of a restaurant forced to close down by government order for a few months was able to continue to be paid through the ERC.
- 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.
- 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.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
If you are an owner of a business and are unsure as to whether you are eligible for ERC, then I would encourage you contact a tax specialist.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
ERC Scams, Aggressive Marketing and Other Risks
Scammers are targeting businesses eligible for the Employee Retention Credit.These scammers may use aggressive marketing tactics to try to convince businesses to sign up for their services, even if the business is not eligible for the ERC.
Red Flags and Warning Signs
Here are some warning signals and red flags that can help you to identify ERC scammers.
- They promise you will get a refund even if they don’t review your records.
- They charge high fees upfront or take a portion of your refund.
- They use high-pressure sales tactics. Employee Retention Tax Credit Filing Deadline
- They aren’t affiliated with an established tax professional association.
- They ask for your personal or financial information upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
You should contact the IRS if you receive a call from an ERC scammer.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting your financial and personal information is also important.You should not provide your personal information to anyone contacting you uninvited.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
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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
We also have some tips and materials for documenting your 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 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 Tax Credit Filing Deadline
What is the ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
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 can receive the ERC?
Eligible business for the ERC includes those who suffered a significant reduction in gross receipts due to government order caused by COVID-19.
What is qualified wage?
Included in qualifying wages are wages, salaries, and tips paid to employees.
The employer’s health insurance premiums are also included in the calculation of wages.
How can I claim my ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended Form 941 X must be submitted within three years from the original date of Form 941.
Do I have to repay my ERC?
The ERC does not require repayment by businesses. It is a tax credit that can be used to offset future taxes.
Can I claim ERC if I received a loan from PPP?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim ERC?
Yes, individuals who are self-employed can qualify for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non-profit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary claim ERC?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
Are there common mistakes that businesses make when claiming ERC to watch out for?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Calculation error on credit
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.