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.The ERC is intended to keep employees employed, even when businesses are unable operate normally.
The ERC can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay afloat.To find out more about ERC and to claim, you can either visit the IRS web site, speak with an advisor, or check 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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Employee Retention CreditHow Do You Claim Employee Retention Credit
Employee Retention credit (ERC), a refundable income tax credit, is available to businesses for wages paid by them during the COVID-19 epidemic.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.To qualify, the business must have seen a significant reduction in gross sales or be suspended fully or partly due to an order from the government related to COVID-19.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was the ERC created?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.The ERC aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
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, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.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 You Claim Employee Retention Credit
Impact of ERC on Businesses and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped businesses weather the storm and stay afloat.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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
There are two ways that businesses can qualify for ERC:
- Fully or partially suspended by a government order: A business that has been fully or partially suspended by a government order due to COVID-19 is eligible for the ERC.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- Significant decline in Gross Receipts: An eligible business who has suffered a significant decrease in gross receipts as a result of COVID-19 may also be eligible for 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.
Example Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
Orders from the government can be used to suspend or fully suspend your work.
- 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 can be awarded to a retail store that has experienced a 50% decrease in sales because of 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
Employee Retention Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The credit amount varies according to the quarter and number of employees of a business.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.A business can receive up to $5,000 in credit per employee for the year 2020.
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.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 the Credit
How to Claim ERC in Federal Employment Taxreturn
To claim the Employee Retention Credit (ERC) on federal employment tax returns, businesses must file an amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.This form can be submitted for any quarter where the business was entitled to the credit.
Claim the ERC in Advance
There are three options available to businesses for claiming ERC:
- 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.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.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 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 Credit Amount and Avoiding Double Dipping with Other Relief Programs
Multiplying employee wages with the applicable credit rate will give you the ERC.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should be careful to avoid double-dipping with other relief programs.Businesses can’t, for instance, claim ERC wages if they also claim Paid Family Leave Credit (PFML) or Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses must keep detailed records on all wages paid during the ERC.This will allow businesses to calculate accurately the amount of credit they are entitled to and support their claim in the event that it is audited. How Do You Claim Employee Retention Credit
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 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 all government orders that affect your business.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses affected by the COVID-19 virus can claim an Employee Retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants forced to close due to government orders
- Retail stores which experienced a significant decrease in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Nonprofit organizations that saw their donations decline
- Hotels and other hospitality enterprises
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons and spas
- Retail stores selling non-essential goods
- Businesses that had to operate on a lower capacity
- Businesses that were forced to implement new safety measures and protocols
- Costs incurred by businesses as a result of 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 You Claim Employee Retention Credit
Here are some examples of how companies have used the ERC in specific situations:
- A restaurant that was forced to close for several months due to a government order was able to use the ERC to keep its employees on the payroll.
- A retail outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- 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 whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing essential services.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified 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, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (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
Here are some warning signs and red flags to identify potential ERC scammers:
- They guarantee to refund your money without looking into your records.
- They charge high upfront fees or a percentage of your refund.
- They use high-pressure sales tactics. How Do You Claim Employee Retention Credit
- They aren’t affiliated with an established tax professional association.
- The first thing they ask you for is your personal and financial information.
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 do this by calling 1-800-829-1040 or by visiting the IRS website.
Also, you should be cautious about protecting your financial and personal data.Do not give your personal information to anyone who contacts you unsolicited.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, 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.The ERC has been explained in detail, including the eligibility requirements and the claim process.
We have also provided some tips and resources for recordkeeping and documentation.ERCs are a valuable tool that employers can use to lower their employment tax liability and improve their cash flow. They also help support their workforce.If you are an eligible employer, we encourage you to claim the credit and seek professional assistance if needed.
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Employee Retention Credit Frequently Asked Questions:
How Do You Claim Employee Retention Credit
What is the ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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 can apply for the ERC program?
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?
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 will accept amended Forms 941 and 941-X from businesses to claim the ERC.The amended Form 941X must be filed no later than three years after the original Form 941.
Do I need to repay the 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?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self employed individuals claim ERC benefits?
Yes, the ERC is available to self-employed people.
Self-employed individuals can claim the ERC on their Schedule C form.
Can non-profit organisations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofit organizations can claim the ERC on their Form 990-T form.
Can companies that own a foreign affiliate claim ERCs?
Yes, employers can claim ERC when they pay wages to foreign employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
What are the common mistakes businesses make when they claim ERC?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Credit calculation error
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.