The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.The ERC is intended to keep employees employed, even when businesses are unable operate normally.
If you are a business owner who has been impacted by the pandemic, the ERC can help you keep your employees on board and your business afloat.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 Employee Retention Credit Became Fraud
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid during the COVID-19 pandemic.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.
The ERC is available to businesses of all sizes, including tax-exempt organizations.For a business to be eligible, it must have suffered a significant decrease in gross revenues or been partially or completely suspended by a government order related to COVID-19.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was the 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’s purpose was to keep employees on the payroll so that businesses could quickly reopen their doors and resume normal operation once the COVID-19 pandemic had subsided.
Benefits of the ERC
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
Businesses can claim the ERC even if they don’t owe taxes.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. How Employee Retention Credit Became Fraud
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 companies to weather the economic storm and remain afloat.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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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 main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.In 2020, the business must have seen a decline of gross receipts by at least 50% in comparison to the same quarter the year before.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
Businesses can qualify for the ERC in two ways:
- 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 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
Here are some examples and scenarios to illustrate each eligibility criterion:
An order of the government may suspend all or part of a program.
- ERC may be available for a restaurant that has to close because of a government directive.
- ERC may be available for a gym which is forced to operate at reduced capacity by a COVID-19 government order.
Significant decline in gross receipts:
- ERC may be available for a retailer that suffers a drop of 50% in sales caused by 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 Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The amount of the credit is dependent on the business’s quarter and employees.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.A business can receive up to $5,000 in credit per employee for the year 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 that a business could receive a credit of up to $7,000 per employee per quarter for the first three quarters of 2021, for a total of up to $21,000 per employee for the year.
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Claiming Credit
How to Claim ERC on Federal Employment Tax Returns
Businesses must amend Form 941X, Adjusted Employer’s Quarterly Federal Income Tax Return or Claim For Refund, to claim the Employee retention credit (ERC) in federal employment tax returns.This form is applicable to any quarter during which the business qualifies for the credit.
Claim the ERC by Claiming it in Advance
There are three options available to businesses for claiming ERC:
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits 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.Businesses can do this by filing Form 941 and indicating how much they will reduce their quarterly employment tax deposits.
- 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 qualified wages by the credit rate applicable, the ERC can be calculated.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Avoid double-dipping when it comes to 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 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. How Employee Retention Credit Became Fraud
Here are a couple of tips to help you with your recordkeeping:
- 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 all the wages that employees receive, including overtime, bonuses, and base wages.
- Track any government orders which may have an impact on the business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Government orders force restaurants to close
- Retail shops that have experienced a substantial decline in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Donations to nonprofit organizations have declined
- Hotels and other hospitality business
- Travel and tourism businesses
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- Salons & spas
- Retail stores selling non-essential goods
- Businesses required to operate under reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Businesses that have experienced an increase in costs as a result COVID-19
Aside from these examples, businesses that have been fully or partly suspended by a government directive or who have experienced a significant drop in gross receipts as a result of COVID-19 are also eligible for ERC. How Employee Retention Credit Became Fraud
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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because 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 organization whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing essential services.
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 determine your qualification and help you claim the credit.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).These scammers might use aggressive advertising tactics to convince businesses that they should sign up for their service, even though the business may not be eligible for ERC.
Warning Signs and Red Flags
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They promise to get you a refund without reviewing 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 Employee Retention Credit Became Fraud
- They aren’t affiliated with an established tax professional association.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activity and Protecting Personal Data
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.
Protecting your financial and personal information is also important.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
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 discussed the ERC eligibility requirements, claim process and potential scams.
Also, we have provided some resources and tips for documenting and keeping records.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and 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 Bonus Frequently Answered Questions
How Employee Retention Credit Became Fraud
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 is eligible to apply for 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.
Employer-paid health insurance premiums also qualify as wages.
How do you claim your ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I have to pay back the 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.
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim the ERC?
Self-employed individuals can apply for the ERC.
Schedule C forms can be claimed by individuals who are self-employed.
Can non-profit organisations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
Before you can get it, however, you must meet some additional requirements.
Are there common mistakes that businesses make when claiming ERC to watch out for?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Calculation error on credit
- All wages are not included
- The failure to amend Form 941-X in time.