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.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
The ERC can be claimed by businesses on the wages they paid employees who qualified during 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.Visit the IRS website to learn more about ERCs and how you can claim them. You can also speak with a tax adviser or read the following.
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 CreditHow Do I Know If I Am Eligible For The Employee Retention Credit?
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.The Coronavirus Aid, Relief, and Economic Security Act created the Employee Retention Credit (ERC) in March 2020. Its purpose is to assist businesses to keep their employees, even if the business is unable to function normally.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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 is able to provide significant financial support for businesses affected by the pandemic.It can assist businesses in retaining their employees, covering payroll costs, as well as investing 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 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.
ERC Benefits
ERC can be a major financial boost for businesses who have been affected by the pandemic.The ERC can help businesses retain employees, which is crucial for a rapid recovery.
Businesses can claim the ERC even if they don’t owe taxes.Businesses may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. How Do I Know If I Am Eligible For The 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.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses 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 main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.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
Business can qualify in two ways for the ERC
- ERC for a business suspended fully or partly by a Government Order: An ERC can be awarded to a business that is suspended either completely or partially by an order of the government due COVID-19.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- Significant drop in gross sales: A business experiencing a significant loss in gross sales due to COVID-19 can also apply for the ERC.Significant decline in gross revenues is defined as at least a 50% decline in a quarterly in 2020, or at least a 20% decline in a quarterly in 2021 when compared with the same quarter the previous year.
Examples and Scenarios
The following are some scenarios and examples that will help you understand each eligibility criteria.
An order of the government may suspend all or part of a program.
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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.
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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 varies depending on how many employees are employed and what quarter it is.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This means that a business could receive a credit of up to $5,000 per employee for 2020.
For the first quarters of 2021, the credit equals 70% of wages that are qualified. However, this is limited to $10,000 per quarter per employee.A business could receive credit up to $7000 per employee, per quarter for the three first quarters of the year 2021.
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Claim the Credit
How to Claim ERC in Federal Employment Taxreturn
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 can claim the ERC in three ways:
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Reduce employment taxes deposits. Businesses are also able to reduce their quarterly employment tax deposits by the amount expected credit.To do so, businesses must fill out Form 941 at the IRS. They will need to indicate how much credit they intend to reduce.
- 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
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.
Avoid double-dipping when it comes to 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 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. How Do I Know If I Am Eligible For The Employee Retention Credit?
Here are a few tips for documenting and keeping records:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track at all times of employee hours, including vacation, sick and holiday leave.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- Keep track of government orders affecting your business.
The IRS provides many resources to assist businesses in claiming the ERC. They include fact sheets, videos, and FAQs.Businesses can also call 1-800-829-1040 to get help from the IRS.
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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.Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail stores that experienced a significant decline in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality businesses
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- 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. How Do I Know If I Am Eligible For The Employee Retention Credit?
Here are a few examples of specific ways businesses have used their 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.
- 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.
- A manufacturer that was unable to operate at full capacity due to supply chain disruptions was able to use the ERC to keep its employees on payroll and continue to produce essential goods.
- A nonprofit that saw their donations decrease due to COVID-19, was able to utilize the ERC and keep its employees employed to continue to provide vital services.
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 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, some scammers take advantage of companies that 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).
Warning Signs and Red Flags
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They guarantee to refund your money without looking into your records.
- You will be charged high fees upfront, or a percentage of your refund.
- The salespeople are aggressive and use high-pressure tactics. How Do I Know If I Am Eligible For The Employee Retention Credit?
- They are not affiliated with a reputable tax professional organization.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
It is important to safeguard your personal and financial 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
In this article, the Employee Retention credit (ERC) is discussed. It’s a tax relief program that helps eligible employers retain their employees during the COVID-19 outbreak.We have explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
Also, we have provided some resources and tips for documenting and keeping records.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’re an eligible employer, you should claim the credit. You can also seek professional advice if you need it.
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Employee Retention Credit: Frequently Asked Questions
How Do I Know If I Am Eligible For The Employee Retention Credit?
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
This credit is equal 50% of qualified wage paid to employees for 2020 and 70% qualified wage paid to employees during the first three-quarters of 2021.
Who is eligible for ERC funding?
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 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 can I claim my ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I need to repay the ERC?
No, it is a refundable credit.
Can I claim ERC even if I have received a PPP Loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed individuals claim the 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?
Nonprofit organizations can apply for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies with a foreign subsidiary claim ERC?
You can claim ERC on wages paid to foreign subsidiaries.
That said, there are some additional requirements that must be met before they can claim it.
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
- Include all wages that qualify
- The failure to amend Form 941-X in time.