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.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.It is designed to help businesses keep their employees on payroll, even if they are unable to 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.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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Employee Retention CreditHow To Determine Eligibility For Employee Retention Credit
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages 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.
ERCs are available to all businesses, even tax-exempt ones.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC created
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.The ERC is designed to help keep businesses open and their employees working so that they can resume normal operations as soon as the pandemic subsides.
ERC Benefits
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can assist in keeping employees on board, which will help the business recover quickly.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any 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 To Determine Eligibility For 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.The ERC also helped to keep businesses afloat through the economic storm.
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 a business’s gross receipts must have declined by at least 50% from the same quarterly period of the previous year.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
Business can qualify in two ways for the 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.The ERC is available to businesses that have been told to close or operate at reduced capacity.
- 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 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
Here are some examples and scenarios to illustrate each eligibility criterion:
Full or partial suspension by government order
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- The ERC is available to gyms that are required to operate with a reduced capacity because of a COVID-19-related government order.
Significant decline in gross receipts:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- 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 varies depending on how many employees are employed and what quarter it is.
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 a company could receive up to a $5,000 credit per employee in 2020.
For the three first quarters of the year 2021, the credit is equal to 70% of the wages qualified to be paid. There is a limit of $10,000 per employee per quarter.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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Claiming Credit
How to Claim the ERC when Filing 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 submitted for any quarter where the business was entitled to the credit.
Claim the ERC in Advance
Businesses have three options for claiming the ERC:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and 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
Multiplying the amount of ERC by the credit rate is how the ERC amount is calculated.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
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
Keep detailed records for all wages that were paid to employees in the ERC period.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 Determine Eligibility For Employee Retention Credit
Here are a couple of tips to help you with your recordkeeping:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Keep track of all wages paid to employees, including base wages, bonuses, and overtime pay.
- Track any government orders which may have an impact on the business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.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 forced to close due to government orders
- Retail stores who experienced a significant drop in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and hospitality businesses
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- 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
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 Determine Eligibility For Employee Retention Credit
Here are some specific examples of how businesses have used the ERC:
- The ERC allowed a restaurant to retain its staff after it was forced to shut down for several months by government order.
- 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.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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 determine your eligibility as well as claim the credit for you if you’re 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 promise you will get a refund even if they don’t review your records.
- They charge high fees upfront or take a portion of your refund.
- They use high-pressure sales tactics. How To Determine Eligibility For Employee Retention Credit
- They are not members of a reputable professional tax organization.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you have been contacted by an ERC scammer , you should notify the IRS .You can call 1-800-829-1040 for more information or go to the IRS web site.
Protecting personal information and financial data is equally important.Don’t give out your personal details to anyone who contacts without asking.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’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 Bonus Frequently Answered Questions
How To Determine Eligibility For Employee Retention Credit
What is ERC?
This is a tax credit that can be refunded to businesses who were affected 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 can receive the ERC?
Eligible businesses include those who have seen a significant decrease in gross revenues or have been suspended fully or partly due to government orders resulting from the COVID-19 Pandemic.
What are qualified wages?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
Health insurance premiums paid by the employer are also considered qualified 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?
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.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed individuals claim the ERC?
Yes, you can get the ERC if you are a self-employed individual.
Self-employed individuals can claim the ERC on their Schedule C form.
Can non-profit organisations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies with a foreign subsidiary claim ERC?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
It is important to note that there are additional requirements for claiming the tax credit.
What are the common mistakes businesses make when they claim ERC?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Calculation error on credit
- Include all wages that qualify
- Failure to amend Forms 901-X by deadline