The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their employees during the 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 can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay afloat.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 CreditSpidell Employee Retention Credit
Employee Retention credit (ERC), a refundable income tax credit, is available to businesses for wages paid by them during the COVID-19 epidemic.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.
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can help businesses to retain employees, pay for payroll, and invest in the 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
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.The ERC can help businesses retain employees, which is crucial for a rapid 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. Spidell Employee Retention Credit
Impact of the ERC on Businesses and the Economy
The ERC helped keep millions of Americans in employment during the COVID-19 Pandemic.It has also helped businesses to stay afloat and weather the economic storm.
The ERC is estimated to have saved over 10 million jobs and prevented hundreds of thousands of businesses from closing their doors.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 only difference between ERC 2020 requirements and those of 2021 is the test for gross receipts.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
Businesses can qualify for the ERC in two ways:
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.This includes businesses who have been ordered closed, to operate at a lower capacity, or to follow certain restrictions.
- 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.Significant decline in gross revenues is defined as at least a 50% decline in a quarterly in 2020, or at least a 20% decline in a quarterly in 2021 when compared with the same quarter the previous year.
Examples and Scenarios
Here are some examples and scenarios to illustrate each eligibility criterion:
A government order can suspend a person’s rights in full or part
- ERC is available to restaurants that are forced to close by a government order.
- 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:
- ERC eligibility is granted to retail stores who experience a sales decline of 50% due to COVID-19.
- 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.
For the first quarters of 2021, the credit equals 70% of wages that are qualified. However, this is limited to $10,000 per quarter per employee.This means a company could receive a credit for up to $7,000 for each employee per quarter in the first three months of 2021. The total for the entire year is up to $21,000.
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Claiming the Credit
How to Claim the ERC when Filing 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 is applicable to any quarter during which the business qualifies for the credit.
Claim the ERC in Advance
There are three options available to businesses for claiming ERC:
- Claim the credit ahead of time: Businesses may claim the credit by reducing the quarterly employment tax deposit.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- 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 qualified wages by the credit rate applicable, the ERC can be calculated.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Businesses should be aware of the dangers of double-dipping.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 keep detailed records detailing all qualified wages paid by employers to employees over the ERC.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Spidell Employee Retention Credit
Here are some tips on recordkeeping and documentation.
- All payroll records should be kept, including W-2s and Forms 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 provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, 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 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 Businesses
- Personal care businesses
- Gyms, fitness studios
- Salons and spas
- Retail stores selling non-essential goods
- Businesses required to operate under reduced capacity
- Businesses forced to comply with 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. Spidell 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.
- A retail store that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its 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.You can get help from a tax professional to determine your eligibility for the ERC and claim it if eligible.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
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
There are warning signs that could indicate an ERC scammer.
- They will refund you without looking at your records.
- They charge high upfront fees or a percentage of your refund.
- They use high-pressure sales tactics. Spidell Employee Retention Credit
- They aren’t affiliated with an established tax professional association.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC fraudster, you must report this activity to the IRS.This can be done by calling 1-800-829-1040, or visiting the IRS’s website.
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 have any doubts about the legitimacy of a business, you can look at their online reviews or ask for help from 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.
Also, we have provided some resources and tips for documenting and keeping records.The ERC provides a valuable incentive that helps employers to reduce their payroll tax liability, improve the cash flow of their business, and provide support for 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:
Spidell Employee Retention Credit
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax 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 receive the ERC?
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?
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 ERCs by filing amended Forms 941 or 941-X at the IRS.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I have to pay back the ERC?
No, it is a refundable credit.
Can I claim ERC even if I have received a PPP Loan?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self-employed people claim the ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can non profit organizations claim ERC?
Yes, nonprofits are eligible for 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.
That said, there are some additional requirements that must be met before they can claim it.
What are the common mistakes businesses make when they claim ERC?
The following are some common mistakes to avoid by businesses when claiming the ERC:
- Wrong calculation on credit
- All wages are not included
- Failing to amend Forms 941-X within the specified timeframe.