COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.There is one lifeline that can help businesses remain 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.It is designed to help businesses keep their employees on payroll, even if they are unable to operate normally.
The ERC may be able to help keep your employees and business afloat if your company has been impacted.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 CreditHurricane Disaster 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 created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 to help businesses keep their employees on the payroll, even if they were unable to operate normally.
ERCs can be obtained by businesses of any size, including those exempt from tax.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.
Businesses that have been affected by this pandemic can receive a substantial financial boost from the ERC.It can assist businesses in retaining their employees, covering payroll costs, as well as investing in their future.
Why was 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 was created to help businesses keep their employees on payroll so that they could quickly reopen and resume normal operations once the pandemic 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, 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. Hurricane Disaster Employee Retention Credit
Impact of the ERC on Businesses and the Economy
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.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 test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.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 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 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
These examples and scenarios illustrate the criteria for each:
A government order can suspend a person’s rights in full or part
- ERC will cover a restaurant which is forced to close down by government orders.
- 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:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to 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 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 the credit varies depending on the quarter and the number of employees a business has.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This means a company could receive up to a $5,000 credit per employee in 2020.
For the first quarters of 2021, the credit equals 70% of wages that are qualified. However, this is limited to $10,000 per quarter per employee.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 for Federal Employment Tax Returns
For businesses to claim Employee Retention Credit on federal employment taxes, they must amend Form 941X – Adjusted Employer’s quarterly Federal Tax Return (or Claim for refund) – in order to do so, they will need to file Form 941X.This form can be filed for any quarter in which the business was eligible for the credit.
Options for Claiming the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim the credit in advance: Businesses can claim the credit in advance by reducing their quarterly employment tax deposits.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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
Multiplying employee wages with the applicable credit rate will give you the ERC.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Businesses must be cautious to not double dip with other relief programmes.For example, businesses can’t claim the ERC if they are also claiming the Paid Family Leave Credit or 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 allow businesses to calculate accurately the amount of credit they are entitled to and support their claim in the event that it is audited. Hurricane Disaster Employee Retention Credit
Here are a few tips for documenting and keeping records:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of the hours that employees work, including sick leave, vacation time, and holidays.
- Track all employee wages, including bonuses, overtime, and base pay.
- Keep track of all government orders that affect your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can also contact the IRS for assistance 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).Here are some businesses that could be eligible for Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores that saw a significant fall in sales
- Disruptions in the supply chains prevent manufacturers from working at 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 & fitness studios
- Salons & spas
- Retail stores selling non-essential goods
- Businesses that have been required to operate in a reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Businesses who experienced higher costs due to 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. Hurricane Disaster Employee Retention Credit
Here are some examples that show how businesses have used ERCs:
- A restaurant that had to close its doors for several weeks due to government orders was able, with the ERC, to keep all of its employees employed.
- The ERC was used by a retail store to offset payroll costs after it experienced a 50% drop in sales as a result of COVID-19.
- ERC allows a company to maintain its workforce and produce essential products despite being unable to run at full capacity.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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 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, some scammers take advantage of companies that qualify for the Employee Retention Credit.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
These warning signs will help you identify possible ERC scammers.
- The company promises to give you a full refund without reviewing any of your records.
- They charge high fees upfront or take a portion of your refund.
- These salespeople use high-pressure tactics. Hurricane Disaster Employee Retention Credit
- They aren’t affiliated with an established tax professional association.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you’re contacted by an ERC con artist, then you should report their activity to IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
It is important to safeguard your personal and financial data.Do not share your personal data with anyone who contacts uninvited.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 we discussed the Employees Retention Credit, tax-relief program that assists eligible employers in keeping their employees on the payroll during the COVID-19 epidemic.We have explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
We’ve also included some resources and advice on recordkeeping.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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Frequently Asked Questions about Employee Retention Credits
Hurricane Disaster 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 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 a qualified wage?
Wages, salaries, tips, and bonuses are all included in the definition of a qualified wage.
All wages that are qualified include health insurance premiums paid to the employer.
How do you claim your ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended Form 941 X must be submitted within three years from the original date of 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 even if I have received a PPP Loan?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed individuals claim ERC?
Yes, self-employed individuals are eligible for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can non-profit organizations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
You can claim ERC on wages paid to foreign subsidiaries.
It is important to note that there are additional requirements for claiming the tax credit.
Are there mistakes that companies make in claiming ERCs?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Wrong calculation on credit
- All wages are not included
- The failure to amend Form 941-X in time.