The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.Employee Retention (ERC) Credit is available to businesses that need it.
The ERC allows businesses to claim a tax credit on wages paid during 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.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 CreditSarah Thomas 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.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, 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.
The ERC is able to provide significant financial support for businesses affected by the pandemic.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
ERC can be a major financial boost for businesses who have been affected by the pandemic.The ERC can help businesses retain employees, which is crucial for a rapid 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 may also claim ERCs on qualified wages for employees who cannot work because of COVID-19. These employees include those who are furloughed. Sarah Thomas Employee Retention Credit
The Impact of the ERC in the Business and Economy
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.It also helped companies to weather the economic storm and remain afloat.
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 to the economic recovery by boosting consumer spending and investment.
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Eligibility
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.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, the business must have suffered from a significant fall in gross sales of at least 20% when compared to same quarter in previous year.
Business Qualifications
The ERC is available to businesses in two different ways.
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.Businesses that are required to close down, operate with a reduced capacity or adhere to certain restrictions can be eligible for the ERC.
- Significant drop in gross sales: A business experiencing a significant loss in gross sales due to COVID-19 can also apply 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.
Examples and Scenarios
You can use the following examples to demonstrate each eligibility criterion.
Fully or partially suspended by a government order:
- ERC will cover a restaurant which is forced to close down by government orders.
- ERC eligibility is granted to a gym that must operate at a lower capacity as a result of a government order relating to COVID-19.
Significant decline in gross receipts:
- ERC is available to retail stores that experience a 50% drop in sales as a result of COVID-19.
- 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
The Employee Retention Credit (ERC) is a tax credit that businesses can claim for qualified wages paid to employees during the COVID-19 pandemic.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.A business can receive up to $5,000 in credit per employee for the year 2020.
For the first three quarters of 2021, the credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per quarter per employee.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 ERC in Federal Employment Taxreturn
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 can be submitted for any quarter where the business was entitled to the credit.
Claim the ERC by Claiming it 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.To do this, business must file IRS Form 7220, Advance Payment for Employer Credits & Taxes.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- Businesses who have already paid employment taxes may request a credit refund by filing IRS Form 941X.
Calculating the Credit Amount and Avoiding Double-dipping with Other Relief Programs
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should be careful to avoid double-dipping with other relief programs.Businesses cannot, for example, claim the ERC on wages they also claim as part of the Paid Family Medical Leave Credit and 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 enable businesses to accurately determine the amount of credit that they are eligible for, and to back up their claim should it be audited. Sarah Thomas 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.
- Keep track of the wages you pay to your employees. This includes base wage, bonuses, and overtime 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 call 1-800-829-1040 to get help from the IRS.
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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.The following are examples of businesses that may be eligible for the Employee Retention Credit (ERC):
- Restaurants are forced to close by government order
- Retail stores that saw a significant fall 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 companies
- Entertainment and event businesses
- Personal care businesses
- Gyms and fitness studios
- Salons & spas
- Retail stores that sell non-essential products
- Businesses that were required to operate at a reduced capacity
- Businesses that are forced to implement new safety 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. Sarah Thomas Employee Retention Credit
Here are a few examples of specific ways businesses have used their 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.
- 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.
- 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 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 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.
Warning Signs and Red Flags
Here are some warnings and red flags for identifying potential ERC fraudsters:
- They promise to get you a refund without reviewing your records.
- They charge you high upfront fees or a certain percentage of your refund.
- They use high-pressure sales tactics. Sarah Thomas Employee Retention Credit
- They are not affiliated to a reputable organization of tax professionals.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.You can do this by calling 1-800-829-1040 or by visiting the IRS website.
You should also be careful to protect your personal and financial information.Do not share your personal data with anyone who contacts uninvited.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 discussed the ERC eligibility requirements, claim process and potential scams.
We have also provided some tips and resources for recordkeeping and documentation.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and 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
Sarah Thomas Employee Retention Credit
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
This credit equals 50% of the qualified wages that employees received in 2020, and 70% of the qualified wages they receive in the first quarter of 2021.
Who can receive the ERC?
Businesses that have experienced a significant drop in gross receipts or those that were suspended or fully suspended by government orders due to the COVID-19 epidemic are eligible for the ERC.
What is qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
All wages that are qualified include health insurance premiums paid to the employer.
How do I claim ERC?
Businesses can claim ERC by submitting an amended Form 941 to the IRS.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
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 if I received a loan from PPP?
You can still claim an ERC even though you received a loan through the Paycheck Protection Programme (PPP).
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self-employed individuals claim ERC?
Self-employed individuals can apply 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, nonprofit organizations are eligible for the ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for the wages they pay to foreign-based employees.
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?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- Wrong calculation on credit
- Include all wages that qualify
- Failure to amend form 941 – X on time.