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.
The ERC can be claimed by businesses on the wages they paid employees who qualified during 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.
The ERC is a great way to keep your employees engaged and your business running smoothly if you’re a business owner impacted by the pandemic.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 CreditJustworks Employee Retention Credit
Employee Retention Tax Credit (ERC), also known as the Employee Retention Tax Credit, is a refundable tax credit that employers can claim for qualifying wages paid to their employees during COVID-19.The Coronavirus Aid, Relief, and Economic Security Act created the Employee Retention Credit (ERC) in March 2020. Its purpose is to assist businesses to keep their employees, even if the business is unable to function normally.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.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’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.
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 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 the ERC for qualified wages paid to employees who are not working due to COVID-19, such as employees who are furloughed or quarantined. Justworks Employee Retention Credit
Impact of ERCs on the Economy and Businesses
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.It has also helped businesses to stay afloat and weather the economic storm.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It also contributed to the recovery of the economy by increasing consumer spending, and investing.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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 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.A significant decline in gross receipts is defined as a decline of at least 50% in a quarter in 2020 or at least 20% in a quarter in 2021 compared to the same quarter in the previous year.
Example Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
Fully or partially suspended by a government order:
- ERC is available to restaurants that are forced to close by a government order.
- A gym that is required to operate at a reduced capacity due to a COVID-19-related government order is eligible for the ERC.
Significant decline in gross receipts:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to 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 (ERC), a tax-credit that businesses can claim, is for wages paid to qualified employees during the COVID-19 epidemic.The credit amount varies according to the quarter and number of employees of a business.
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.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.For the first 3 quarters in 2021, an employer could receive up to $7,000 per employee each quarter. That’s up $21,000 per worker for the whole year.
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Claiming the Credit
How to Claim ERC on Federal Employment Tax Returns
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 can be submitted for any quarter where the business was entitled to the credit.
Claim the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.Businesses must submit Form 7200 to the IRS, Advance Payments of Employer Taxes and Credits.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- 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 Credit Amount and Avoiding Double-dipping with Other Relief Programs
The ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.The credit rate for 2020 is 50% and for the first quarter of 2021, it’s 70%.
Businesses should be aware of the dangers of double-dipping.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 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. Justworks Employee Retention Credit
Here are some tips for recordkeeping and documentation:
- 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.
- Track all employee wages, including bonuses, overtime, and base 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
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 are forced to close by government order
- Retail shops that have experienced a substantial decline in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Nonprofit organizations that saw their donations decline
- Hotels and other hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons and spas
- Retail shops selling non-essential items
- Businesses that have been required to operate in a reduced capacity
- Businesses forced to comply with new safety protocols
- Businesses that experienced increased 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. Justworks Employee Retention Credit
Here are a few examples of specific ways businesses have used their ERC:
- 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.
- An ERC offset the payroll costs of a retail shop that saw a 50% decrease in sales because of COVID-19.
- ERC was used by a manufacturer that could not operate at full capacity due to disruptions in the supply chain to keep employees employed and continue production of essential goods.
- A nonprofit that saw their donations decrease due to COVID-19, was able to utilize the ERC and keep its employees employed to continue to provide vital services.
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
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
There are warning signs that could indicate an ERC scammer.
- They promise to get you a refund without reviewing your records.
- The fees are high, or they take a large percentage of the refund.
- The salespeople are aggressive and use high-pressure tactics. Justworks Employee Retention Credit
- 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
You should contact the IRS if you receive a call from an ERC scammer.Call 1-800-829-1040 to report the scam or visit the IRS website.
Also, you should be cautious about protecting your financial and personal data.You should not provide your personal information to anyone contacting you uninvited.If you’re not sure if a company is legit or not, you should check reviews online. You can also contact the IRS.
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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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
We have also provided some tips and resources for recordkeeping and documentation.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 Bonus Frequently Answered Questions
Justworks Employee Retention Credit
What is the ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
This credit is equal 50% of qualified wage paid to employees for 2020 and 70% qualified wage paid to employees during the first three-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?
Salary, wages, bonuses, and tips are all considered to be wages.
The employer’s health insurance premiums are also included in the calculation of wages.
How can I claim my 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?
No, it is a refundable 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 can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim ERC?
Yes, self-employed individuals are eligible for the ERC.
The Schedule C can be used by self-employed individuals to claim the ERC.
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 with a foreign subsidiary claim ERC?
Businesses can claim ERC for the wages they pay to foreign-based employees.
It is important to note that there are additional requirements for claiming the tax credit.
Are there mistakes that companies make in claiming ERCs?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Incorrect credit calculation
- Inclusion of all eligible wages
- The failure to amend Form 941-X in time.