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.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
The ERC can be claimed by businesses on the wages they paid employees who qualified during pandemic.It’s designed to help employers keep their employees, even if the business is unable to function 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 find out more about ERC and to claim, you can either visit the IRS web site, speak with an advisor, or check 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 CreditOutstanding Employee Retention Credit Under The Cares Act
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 established by the Coronavirus Aid, Relief, and Economic Security Act in March 2020 in order to help businesses retain their employees, even if it meant they could not operate normally.
ERCs can be obtained by businesses of any size, including those exempt from tax.To be eligible for the ERC, a company must have had a significant fall in gross receipts and/or have been fully or partial suspended as a result of an COVID-19 government order.
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 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
ERCs can give businesses impacted by pandemics a financial boost.The ERC can help businesses retain employees, which is crucial for a rapid recovery.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.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. Outstanding Employee Retention Credit Under The Cares Act
Impact of ERCs on the Economy and Businesses
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.It also helped businesses weather the storm and stay afloat.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
For businesses affected by COVID-19, the Employee Retention Credit can help them retain their employees.
The main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.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, an organization must have suffered a significant drop in gross receipts by at least 20% from the same quarter the year before.
Business Qualifications
The ERC is available to businesses in two different ways.
- 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 revenues: Businesses that have experienced a significant drop in gross revenue due to COVID-19 are also eligible for ERC.Significant declines in gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
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 may be available for a restaurant that has to close because of a government directive.
- ERC can be awarded to a fitness center that has to operate on a reduced basis due to an order from the government based on COVID-19.
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 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 credit depends on the number of employees and the quarter.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.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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Claiming 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 can be filed for any quarter in which the business was eligible for the credit.
Claim the ERC by Claiming it in Advance
Businesses have three choices for claiming ERCs:
- Claim the credit ahead of time: Businesses may claim the credit by reducing the quarterly employment tax deposit.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Reduce employment tax deposits: Businesses can also reduce their quarterly employment tax deposits by the amount of the credit they expect to receive.Businesses can do this by filing Form 941 and indicating how much they will reduce their quarterly employment tax deposits.
- Businesses that already pay their employment taxes to the IRS can request a reimbursement of the credit. To do this, they must file 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%.
Businesses should be careful to avoid double-dipping with 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
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. Outstanding Employee Retention Credit Under The Cares Act
Here are a couple of tips to help you with your recordkeeping:
- Keep a copy of all payroll records, including W-2 forms and Form 941s.
- Keep track of all the hours worked by your employees including holidays, sick days, and vacations.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime pay.
- Keep track of any orders from the government that may affect your business.
The IRS offers a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can call the IRS at 1-800-829-1040 for assistance.
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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.
- Government orders force restaurants to close
- Retail stores who experienced a significant drop in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Donations of nonprofit organizations declined
- Hotels and other hospitality business
- Travel and tourism business
- Entertainment and event business
- Personal care businesses
- Fitness studios and gyms
- Salons and spas
- Retail stores that sell non-essential products
- Businesses required to operate under reduced capacity
- Businesses who are required to implement new safety standards and protocols
- Businesses who experienced higher costs due to 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. Outstanding Employee Retention Credit Under The Cares Act
Below are some specific examples on how businesses have utilized the ERC.
- 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.
- 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.
- The ERC allowed a nonprofit organization to continue providing essential services despite a decline in donations due to COVID-19.
If you are an owner of a business and are unsure as to whether you are eligible for ERC, then I would encourage you contact a tax specialist.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).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
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.
- You will be charged high fees upfront, or a percentage of your refund.
- Sales tactics are high-pressure. Outstanding Employee Retention Credit Under The Cares Act
- They aren’t affiliated with an established tax professional association.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
Protecting your financial and personal information is also important.Do not give your personal information to anyone who contacts you unsolicited.If you want to know if a particular business is legit, check online reviews. Or contact the IRS.
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Conclusion
In this article, the Employee Retention credit (ERC) is discussed. It’s a tax relief program that helps eligible employers retain their employees during the COVID-19 outbreak.We have explained the eligibility requirements, the claiming process, and the potential scams related to 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.If you are an eligible employer, we encourage you to claim the credit and seek professional assistance if needed.
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Employee Retention Bonus Frequently Answered Questions
Outstanding Employee Retention Credit Under The Cares Act
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
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 apply for the ERC program?
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 is a qualified wage?
Wages, salaries, tips, and bonuses are all included in the definition of a qualified wage.
Employer-paid health insurance premiums also qualify as wages.
How do you claim your ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with 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?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC if I received a loan from PPP?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed people claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can non-profit organisations claim ERC?
Yes, nonprofits are eligible for 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.
Are there mistakes that companies make in claiming ERCs?
There are a few common mistakes that businesses should avoid when claiming an ERC. These include but are not restricted to
- Incorrect credit calculation
- Failure to include all qualified wages
- The failure to amend Form 941-X in time.