COVID-19 has caused massive damage to businesses of every size, with many being forced to cut staff or shut down their doors.But there is a lifeline available to help businesses stay 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 was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
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.For more information on the ERC and how to apply for it, you can visit the IRS site, talk with a professional 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 CreditLisa Wilson Employee Retention Credit
The Employee Retention Credit (ERC) is a refundable tax credit that businesses can claim for qualified wages paid to employees during the COVID-19 pandemic.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.
The ERC is available to businesses of all sizes, including tax-exempt organizations.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 to retain employees, pay for payroll, and invest in the future.
Why was ERC created?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.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.
Benefits of the ERC
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 claim the ERC on wages paid to employees that are not working because of COVID-19. This includes employees who have been furloughed, quarantined, or are otherwise not allowed to work. Lisa Wilson 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.The ERC has helped many businesses stay afloat during the COVID-19 pandemic.
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 towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The primary difference between ERC requirements for 2020 and 2021 is a test of gross receipts decline.In order to qualify for the 2020 ERC, businesses must have had a substantial decline in gross revenues of at least half compared with the same quarter last 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.This includes businesses that have been ordered to close, operate at a reduced capacity, or follow certain restrictions.
- Significant decline in gross receipts: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.Significant declines in gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Example 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.
- ERC can be claimed by a restaurant forced to shut down due to an order from the government.
- 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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- A manufacturer that is unable to operate at full capacity due to supply chain disruptions is eligible for the ERC.
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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 is dependent on the business’s quarter and employees.
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.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
Businesses that wish to claim the Employee Retention credit (ERC), on their federal employment tax returns must use Form 941-X, Revised Employer’s Quarterly Tax Return, or Claim for Refund.This form is applicable to any quarter during which the business qualifies for the credit.
Options for Claiming the ERC in Advance
Businesses have three options to claim the ERC.
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.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 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
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 should be careful to avoid double-dipping with other relief programs.For example businesses cannot claim ERC for wages used to claim Paid Family and medical leave credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documentation
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.This will assist businesses in accurately calculating the amount they are entitled for as well as supporting their claim if the IRS audits it. Lisa Wilson Employee Retention Credit
Here are some tips on recordkeeping and documentation.
- 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.
- Keep track of government orders affecting your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses that are affected by COVID-19 can receive the Employee Retention (ERC).These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores that saw a significant fall in sales
- Manufacturing companies are unable to reach full capacity because of supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and other hospitality businesses
- Travel and Tourism Businesses
- Entertainment and event business
- Personal care businesses
- Gyms and fitness studios
- Salons and 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 that have experienced an increase in costs as a result COVID-19
These examples are not the only ones that qualify. Any business that has been suspended in whole or part by an order of government or that has seen a decline in gross sales due to COVID-19 could also be eligible. Lisa Wilson Employee Retention Credit
Below are some specific examples on how businesses have utilized 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.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.They can determine your qualification and help you claim the credit.
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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).These scammers use aggressive marketing to convince businesses to subscribe to their services even if that business isn’t eligible for the Employee Retention Credit (ERC).
Warning Signs and Red Flags
There are warning signs that could indicate an ERC scammer.
- They promise you will get a refund even if they don’t review your records.
- They charge high upfront fees or a percentage of your refund.
- High-pressure sales tactics are used. Lisa Wilson Employee Retention Credit
- They are not members of a reputable professional tax organization.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.You can report this activity by calling 1-800-829-1040.
Protecting personal information and financial data is equally important.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
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 also have some tips and materials for documenting your records.The ERC can be a valuable benefit for employers, helping them reduce their employment taxes, improve their cashflow, and support their employees.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
Lisa Wilson 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 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 for ERC funding?
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?
Included in qualifying wages are wages, salaries, and tips paid to employees.
All wages that are qualified include health insurance premiums paid to the employer.
How do I claim ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended Form 941 X must be submitted within three years from the original date of Form 941.
Do I have to pay back the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC even if I have received a PPP Loan?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
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 non-profit organizations claim ERC?
Yes, organizations that are not for profit can qualify for the ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Businesses can claim ERC for the wages they pay to foreign-based employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
Are there common mistakes that businesses make when claiming ERC to watch out for?
When claiming your ERC; businesses must be aware of the following mistakes:
- Calculation error on credit
- The failure to include all qualifying wages
- Failing to amend Forms 941-X within the specified timeframe.