COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.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 is designed to help businesses keep their employees on payroll, even if they are unable to operate 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.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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The Employee Retention CreditFederally Mandated Employee Retention Credit
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.
ERC is open to businesses and organizations of all sizes.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.
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
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 is designed to help keep businesses open and their employees working so that they can resume normal operations as soon as the pandemic subsides.
Benefits of the ERC
ERC can offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can also be used to retain staff, which is important for a swift 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 may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. Federally Mandated Employee Retention Credit
Impact of ERC on Businesses and the Economy
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.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 has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.In 2020, an enterprise must have suffered a significant drop in gross receipts that is at least 50 percent less than the same period in the previous calendar year.In 2021, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
Business can qualify in two ways 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 gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
A government order can suspend a person’s rights in full or part
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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 eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- ERC can be awarded to a manufacturer who cannot operate at full capability due to disruptions to the supply chain.
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Credit Amount
Employee Retention Tax Credit (ERC), is a credit for businesses that can be claimed on qualified wages paid by employers to their employees during COVID-19.The amount of credit depends on the number of employees and the quarter.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.For 2020, a business may receive a maximum credit of $5,000 per employee.
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 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.
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Claim your Credit
How to Claim ERC on 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 can be filed for any quarter in which the business was eligible for the credit.
Claim the ERC in Advance
Businesses have three options to claim the ERC.
- 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.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- Businesses who have already paid employment taxes may request a credit refund by filing IRS Form 941X.
Calculating the Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
Multiplying employee wages with the applicable credit rate will give you the ERC.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.For example businesses cannot claim ERC for wages used to claim Paid Family and medical leave credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documenation
Businesses should maintain detailed records of the wages they paid to their employees 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. Federally Mandated Employee Retention Credit
Here are a couple of tips to help you with your recordkeeping:
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Keep track of all wages paid to employees, including base wages, bonuses, and overtime pay.
- Track any government orders which may have an impact on the business.
The IRS provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can also contact the IRS for assistance 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.The following are examples of businesses that may be eligible for the Employee Retention Credit (ERC):
- Restaurants forced to shut down due to government order
- Retail stores which experienced a significant decrease in sales
- Disruptions in the supply chains prevent manufacturers from working at full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality enterprises
- Travel and Tourism Businesses
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Retail shops selling non-essential items
- Businesses that have been required to operate in a reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Costs incurred by businesses as a result of COVID-19
These examples are not the only ones that qualify. Any business that has been suspended in whole or part by an order of government or that has seen a decline in gross sales due to COVID-19 could also be eligible. Federally Mandated Employee Retention Credit
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.
- A retail outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- 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.
- An organization that had seen its donations drop due to COVID-19 could use the ERC in order to keep their employees on the payroll and continue to offer essential services.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
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
There are warning signs that could indicate an ERC scammer.
- They will refund you without looking at your records.
- They charge you high upfront fees or a certain percentage of your refund.
- They use high-pressure sales tactics. Federally Mandated Employee Retention Credit
- They aren’t affiliated with an established tax professional association.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Actors and Protecting Your 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.
Also, you should be cautious about protecting your financial and personal data.Don’t give out your personal details to anyone who contacts without asking.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.We have discussed eligibility requirements, claiming processes, and possible scams related the ERC.
We have also provided some tips and resources for recordkeeping and documentation.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support their employees.If you’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
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Frequently Asked Questions about Employee Retention Credits
Federally Mandated Employee Retention Credit
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 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 a qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Also, health insurance premiums that employers pay are considered wages.
How do I claim the ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I have to repay my ERC?
No, it is a refundable credit.
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).
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed individuals can claim the ERC on their Schedule C form.
Can non profit organizations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
Before you can get it, however, you must meet some additional requirements.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout 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
- Failing to amend Forms 941-X within the specified timeframe.