The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.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.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 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.To learn more about the ERC and how to claim it, visit the IRS website, speak with a 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 CreditHow To Apply For The Employee Retention Tax 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.It was created as part of the Coronavirus Aid, Relief, and Economic Security Act, in March 2020, to help companies keep their employees, despite being unable operate normally.
The ERC is available to businesses of all sizes, including tax-exempt organizations.To be eligible, a business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to a COVID-19-related government order.
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can help businesses to retain employees, pay for payroll, and invest in the future.
Why was ERC formed?
The COVID-19 epidemic caused a severe downturn in the economy, which forced many businesses to close or lay off their employees.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
ERCs can give businesses impacted by pandemics a financial boost.It can also be used to retain staff, which is important for a swift recovery.
The ERC can be claimed by businesses even if no taxes are 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. How To Apply For The Employee Retention Tax Credit
Impact of ERCs on the Economy and Businesses
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.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 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’s gross receipts must have declined by at least 50% from the same quarterly period of 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
Business can qualify in two ways for the ERC
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- 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
The following are some scenarios and examples that will help you understand each eligibility criteria.
Orders from the government can be used to suspend or fully suspend your work.
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- ERC eligibility is granted to a gym that must operate at a lower capacity as a result of a government order relating to COVID-19.
Significant decline in gross receipts:
- ERC is available to retail stores that experience a 50% drop in sales as a result of COVID-19.
- ERC is available to manufacturers who are unable to run at full capacity because of supply chain disruptions.
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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.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This could mean that an employer can get a credit up to $5,000 for 2020.
The credit for the first three quarters of 2021 is 70% of the qualified wages paid by employees. This maximum amount per employee per quarter is $10,000.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 for Federal Employment Tax Returns
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 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 the credit in advance: Businesses can claim the credit in advance by reducing their quarterly employment tax deposits.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- Request a refund: Businesses that have already paid their employment taxes can request a refund of the credit by filing Form 941-X with the IRS.
Calculating the Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Businesses should avoid double-dipping on other relief programs.Businesses cannot, for example, claim the ERC on wages they also claim as part of the Paid Family Medical Leave Credit and 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 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 To Apply For The Employee Retention Tax Credit
Here are some helpful tips on documenting your records and documents:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track of every employee’s hours, including sick time, holiday, and vacation.
- 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 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 are forced to close by government order
- Retail shops that have experienced a substantial decline in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms and fitness studios
- Salons & spas
- Retail stores selling non essential goods
- Businesses required to operate under reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Costs incurred by businesses as a result of 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 To Apply For The Employee Retention Tax Credit
Here are a few examples of specific ways businesses have used their ERC:
- 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 store that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its payroll costs.
- ERC can be used by a producer who is unable operate at maximum capacity due to disruptions of the supply chain. This allows them to keep their employees and continue producing essential products.
- A nonprofit organization that saw its donations decline due to COVID-19 was able to use the ERC to keep its employees on payroll and continue to provide 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.You can get help from a tax professional to determine your eligibility for the ERC and claim it if eligible.
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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 can use aggressive marketing strategies to convince companies to sign-up for their services even when they are not eligible to receive the 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.
- The fees are high, or they take a large percentage of the refund.
- High-pressure sales tactics are used. How To Apply For The Employee Retention Tax Credit
- They are not affiliated to a reputable organization of tax professionals.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting your financial and personal information is also important.You should not provide your personal information to anyone contacting you uninvited.You can find reviews of a company online, or you can contact the IRS if you’re unsure.
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Conclusion
In this article, we have discussed the Employee Retention Credit (ERC), a tax relief program that helps eligible employers keep their employees on payroll during the COVID-19 pandemic.The ERC has been explained in detail, including the eligibility requirements and the claim process.
Also, we have provided some resources and tips for documenting and keeping records.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.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
How To Apply For The Employee Retention Tax Credit
What is the ERC?
It is a refundable tax credit available to businesses that were impacted by the COVID-19 pandemic.
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 for 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 are qualified wages?
Included in qualifying wages are wages, salaries, and tips paid to employees.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I need to repay the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC even if I have received a PPP Loan?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed people claim the ERC?
Self-employed individuals can apply for the ERC.
Schedule C forms can be claimed by individuals who are self-employed.
Can nonprofit 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 that own a foreign affiliate claim ERCs?
Businesses can claim ERC for the wages they pay to foreign-based employees.
There are a few additional requirements to meet before you can claim the benefit.
What are the common mistakes businesses make when they claim ERC?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Wrong calculation on credit
- Include all wages that qualify
- Failure to amend form 941 – X on time.