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.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their employees during the pandemic.The ERC is intended to keep employees employed, even when businesses are unable 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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The Employee Retention CreditKpmg Employee Retention Credit
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid 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.
ERC is open to businesses and organizations of all sizes.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.
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 formed?
The COVID-19 Pandemic caused an economic downturn that forced many businesses either to layoff employees or shut their doors.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 be a major financial boost for businesses who have been affected by the pandemic.It can also assist businesses in retaining their employees. This is vital for a fast recovery.
Businesses can claim the ERC even if they don’t owe taxes.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. Kpmg Employee Retention Credit
Impact of ERC on Business and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.The ERC also helped to keep businesses afloat through the economic storm.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.It has also contributed to the economic recovery by boosting consumer spending and investment.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.In 2020, a business must have experienced a significant decline in gross receipts of at least 50% compared to the same quarter in the previous year.In 2021, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
There are two ways that businesses can qualify for ERC:
- ERC eligibility is based on whether the business has been suspended completely or in part due to COVID-19.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.
Examples and Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
Fully or partially suspended by a 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 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 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.A business can receive up to $5,000 in credit per employee for the year 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 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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Claim the Credit
How to Claim the ERC when Filing 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 may be used for any quarter that the business is eligible for the credit.
Claim the ERC in Advance
Businesses can claim the ERC in three ways:
- 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.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.To do so, businesses must fill out Form 941 at the IRS. They will need to indicate how much credit they intend to reduce.
- 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 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%.
Businesses should avoid double-dipping on other relief programs.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 of all qualified wages paid to employees during 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. Kpmg Employee Retention Credit
Here are some tips for recordkeeping and documentation:
- All payroll records should be kept, including W-2s and Forms 941s.
- 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 government orders affecting your business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can also contact the IRS for assistance by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).Here are some businesses that could be eligible for Employee Retention Credit.
- Restaurants forced to close due to government orders
- Retail stores that saw a significant fall in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Non-profit organizations who saw their donations decrease
- Hotels and other hospitality enterprises
- Travel and tourism businesses
- Entertainment and event business
- Personal care businesses
- Gyms, fitness studios
- Salons and spas
- Retail stores selling non-essential goods
- Businesses that had to operate on a lower capacity
- Businesses forced to comply with new safety protocols
- Costs incurred by businesses as a result of COVID-19
ERCs may be awarded to any business, including those that were fully or partially closed by a government order and/or experienced a significant decrease in gross receipts because of COVID-19. Kpmg 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 outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their 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.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
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.They can determine your qualification and help you claim the credit.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
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.
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- The company promises to give you a full refund without reviewing any of your records.
- You will be charged high fees upfront, or a percentage of your refund.
- Sales tactics are high-pressure. Kpmg Employee Retention Credit
- They are not affiliated to a reputable organization of tax professionals.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Actors and Protecting Your Personal Information
You should contact the IRS if you receive a call from an ERC scammer.You can report this activity by calling 1-800-829-1040.
Also, you should be cautious about protecting your financial and personal data.Do not share your personal data with anyone who contacts 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
This article has discussed the Employee retention credit (ERC), which is a tax relief that allows eligible employers to keep their employees employed during the COVID-19 Pandemic.We have discussed eligibility requirements, claiming processes, and possible scams related the ERC.
We have also provided tips and resources on recordkeeping and documentation.ERCs are a valuable tool that employers can use to lower their employment tax liability and improve their cash flow. They also help support their workforce.We encourage eligible employers to claim this credit and, if necessary, seek professional help.
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Employee Retention Credit: Frequently Asked Questions
Kpmg Employee Retention Credit
What is ERC?
The COVID-19 pandemic has impacted businesses. A refundable tax credit is available.
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 companies for the ERC are those businesses that experienced a significant fall in gross sales or were partially or completely suspended because of government orders triggered by the COVID-19 outbreak.
What are qualified wages?
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 do I claim ERC?
The IRS will accept amended Forms 941 and 941-X from businesses to claim the ERC.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 does not require repayment by businesses. It is a tax credit that can be used to offset future taxes.
Can I claim the ERC if I received a PPP loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed people claim the ERC?
Yes, you can get the ERC if you are a self-employed individual.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non-profit organisations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies with a foreign subsidiary claim ERC?
You can claim ERC on wages paid to foreign subsidiaries.
That said, there are some additional requirements that must be met before they can claim it.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Calculation error on credit
- Failure to include all qualified wages
- Failure to amend Form 941-X on time.