The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.Employee Retention (ERC) Credit is available to businesses that need it.
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to employees during the pandemic.The ERC was created to ensure that businesses can continue to pay employees during a pandemic, even if their normal business operations are disrupted.
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.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 Recovery Startup Business
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.A business must be eligible if it has experienced a significant drop in gross receipts, or if they have been suspended or fully suspended because of a COVID-19 related government order.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC formed?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.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
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.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 Recovery Startup Business
The Impact of the ERC in the Business and Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped businesses weather the storm and stay 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 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 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 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
There are two ways that businesses can qualify for ERC:
- ERC eligibility is based on whether the business has been suspended completely or in part due to COVID-19.The ERC is available to businesses that have been told to close or operate at reduced capacity.
- 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 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
The following are some scenarios and examples that will help you understand each eligibility criteria.
Full or partial suspension by government order
- ERC will cover a restaurant which is forced to close down by government orders.
- 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 is available to retail stores that experience a 50% drop in sales as a result of COVID-19.
- A manufacturer that is unable to operate at full capacity due to supply chain disruptions is eligible for the ERC.
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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 amount of the credit is dependent on the business’s quarter and employees.
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.
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 ERC for 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 is applicable to any quarter during which the business qualifies for the credit.
Options for Claiming the ERC in Advance
Businesses have three choices for claiming ERCs:
- 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 may also reduce their quarterly tax deposits on employment by the credit amount they expect.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- 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
Multiplying the amount of ERC by the credit rate is how the ERC amount is calculated.The credit rate is 50% for 2020 and 70% for 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
Businesses should keep detailed records of all qualified wages paid to employees during 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 Tax Credit Recovery Startup Business
Here are some tips for recordkeeping and documentation:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of all the hours worked by your employees including holidays, sick days, and vacations.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- Keep track of any orders from the government that may affect your business.
The IRS provides many resources to assist businesses in claiming the ERC. They include fact sheets, videos, and FAQs.Businesses can call the IRS at 1-800-829-1040 for assistance.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail shops that have experienced a substantial decline in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and hospitality businesses
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons & spas
- Retail shops selling non-essential items
- Businesses required to operate under reduced capacity
- Businesses forced to adopt new safety protocols and measures
- 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 Tax Credit Recovery Startup Business
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.
- A retail store which experienced a drop of 50% in sales due COVID-19 could offset its payroll expenses by using the ERC.
- 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.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Unfortunately, scammers try to take advantage businesses who qualify for the Employee Retention Credit.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 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 Tax Credit Recovery Startup Business
- They aren’t affiliated with an established tax professional association.
- Your personal or financial data is requested upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC fraudster, you must report this 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.If you are unsure whether or not a business is legitimate, you can check their reviews online or contact the IRS for assistance.
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Conclusion
In this article we discussed the Employees Retention Credit, tax-relief program that assists eligible employers in keeping their employees on the payroll during the COVID-19 epidemic.We have explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
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 qualify as an employer, please claim the ERC and get professional assistance if you require it.
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Employee Retention Credit: Frequently Asked Questions
Employee Retention Tax Credit Recovery Startup Business
What is ERC?
It is a refundable tax credit available to businesses that were impacted by the COVID-19 pandemic.
This credit is equal to 50% of qualified wages paid to employees in 2020 and 70% of qualified wages paid to employees in the first three quarters of 2021.
Who is eligible for the ERC?
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 are qualified wages?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I have to repay my ERC?
The ERC, however, is a non-refundable tax credit.
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 benefits?
Yes, you can get the ERC if you are a self-employed individual.
Schedule C forms can be claimed by individuals who are self-employed.
Can non-profit organisations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofit organizations can claim the ERC on their Form 990-T form.
Can companies with a foreign subsidiary claim ERC?
You can claim ERC on wages paid to foreign subsidiaries.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
Are there mistakes that companies make in claiming ERCs?
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.