The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.Employee Retention (ERC) Credit is available to businesses that need it.
The ERC can be claimed by businesses on the wages they paid employees who qualified during pandemic.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
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 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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The Employee Retention CreditHow To Calculate Qualified Wages For The 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.It was established by the Coronavirus Aid, Relief, and Economic Security Act in March 2020 in order to help businesses retain their employees, even if it meant they could not operate normally.
ERC is open to businesses and organizations of all sizes.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 provides a financial boost for businesses that are affected by pandemic.It can help businesses to retain employees, pay for payroll, and invest in the 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 offer a significant boost in financial support to businesses impacted negatively by the pandemic.It can also help businesses retain their employees, which is essential for a quick 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 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 To Calculate Qualified Wages For The Employee Retention Credit
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.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.It has also contributed to the economic recovery by boosting 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 decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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, an organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
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.This includes businesses who have been ordered closed, to operate at a lower capacity, or to 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 decline in Gross Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- ERCs are available for manufacturers that cannot operate at their full capacity as a result of disruptions in supply chains.
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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.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.This means that a business could receive a credit of up to $5,000 per employee 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.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 the Credit
How to Claim ERC in Federal Employment Taxreturn
To claim the Employee-Retention Credit (ERC), businesses must file a Form 941-941-X, Adjusted Employer Quarterly Federal Tax return or Claim of Refund.This form is applicable to any quarter during which the business qualifies for the credit.
Claim the ERC by Claiming it in Advance
Businesses have three options for claiming the ERC:
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.Businesses can do this by filing Form 941 and indicating how much they will reduce their quarterly employment tax deposits.
- Request a Refund: Businesses who have already paid their Employment Taxes can request to receive a refund for the credit by submitting Form 941X to the IRS.
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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Avoid double-dipping when it comes to other relief programs.For example, businesses cannot claim the ERC for wages that are also used to claim the Paid Family and Medical Leave Credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should keep detailed records detailing all qualified wages paid by employers to employees over 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 To Calculate Qualified Wages For The Employee Retention 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.
- Track all employee wages, including bonuses, overtime, and base pay.
- Keep track of any orders from the government that may affect 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.These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail stores which experienced a significant decrease 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 enterprises
- Travel and tourism business
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons, spas
- Retail stores selling non-essential goods
- Businesses required to operate under reduced capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses that have experienced an increase in costs as a result COVID-19
The ERC may also be available to businesses that were suspended or partially by government orders or experienced a substantial decline in gross revenues due to COVID-19. How To Calculate Qualified Wages For The Employee Retention Credit
Here are some examples that show how businesses have used ERCs:
- A restaurant, which was forced to close due to an order from the government for a period of several months, was able use the ERC in order to keep their employees on the payroll.
- A retail store which experienced a drop of 50% in sales due COVID-19 could offset its payroll expenses by using the ERC.
- 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.
- 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.
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 assist you in determining your eligibility, and claiming the credit, if you qualify.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, some scammers take advantage of companies that qualify for the Employee Retention Credit.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.
Red Flags and Warning Signs
These warning signs will help you identify possible ERC scammers.
- They will refund you without looking at your records.
- You will be charged high fees upfront, or a percentage of your refund.
- They use high-pressure sales tactics. How To Calculate Qualified Wages For The Employee Retention Credit
- They are not members of a reputable professional tax organization.
- Your personal or financial data is requested upfront.
Reporting Suspicious Activities and Protecting Personal Information
You should contact the IRS if you receive a call from an ERC scammer.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
You should also be careful to protect your personal and financial information.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
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 eligibility requirements, claiming processes, and possible scams related the ERC.
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’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 To Calculate Qualified Wages For The Employee Retention Credit
What is ERC?
It is a refundable tax credit available to businesses that were impacted by the COVID-19 pandemic.
This credit is equal in value to 50% of wages qualified to be paid in 2020. It is also equal in value to 70% of wages qualified to be paid in the first 3 quarters of 2021.
Who is eligible for the ERC?
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 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 can I claim my ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended form 941-X is required to be filed within 3 years from the date that the original Form 941 has been filed.
Do I have to repay my ERC?
No, the ERC is a refundable tax credit, which means that businesses do not need to repay it.
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.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self employed individuals claim ERC benefits?
Self-employed individuals can apply for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non-profit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for 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 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.
- The credit calculation is incorrect
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.