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.Employee Retention Bonus (ERB) is a way to keep businesses afloat.
The ERC is an refundable tax credit which businesses can claim for wages that were paid to their employees during the pandemic.It is designed to help businesses keep their employees on payroll, even if they are unable to operate normally.
The ERC can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay 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 CreditUpdated Employee Retention Credit
Employee Retention (ERC) Credit is a refundable credit that businesses may claim on wages paid 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.
ERCs are available to all businesses, even tax-exempt ones.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.
The ERC provides a financial boost for businesses that are affected by pandemic.It can help businesses retain their employees, cover payroll costs, and invest in their future.
Why was ERC formed?
The COVID-19 pandemic triggered a severe economic recession, forcing many companies to layoff their employees or close down.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.
Benefits of the ERC
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.
The ERC is a refundable tax credit, meaning that businesses can claim it even if they do not owe any taxes.Businesses can also claim the ERC for qualified wages paid to employees who are not working due to COVID-19, such as employees who are furloughed or quarantined. Updated Employee Retention Credit
Impact of the ERC on Businesses and the Economy
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It has also helped businesses to stay afloat and weather the economic storm.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It also contributed to the recovery of the economy by increasing consumer spending, and investing.
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Eligibility
The Employee Retention Credit (ERC) can be claimed by businesses that have suffered a decline in gross sales or been suspended because of a COVID-19 government order.
The decline in gross revenues test is the major difference between the ERC 2020 and ERC 2021 requirements.In 2020, an enterprise must have suffered a significant drop in gross receipts that is at least 50 percent less than the same period in the previous calendar year.In 2021 a business will have to experience a significant decrease in gross revenues of at least 20 percent compared with the same quarter last year.
Business Qualifications
Business can qualify in two ways for the ERC
- ERC for a business suspended fully or partly by a Government Order: An ERC can be awarded to a business that is suspended either completely or partially by an order of the government due 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: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.Significant decline in Gross Receipts: A business that has experienced a significant decline in its gross receipts due to COVID-19 is also eligible for the ERC.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- ERC eligibility is for a manufacturer who is not able to operate at maximum capacity due to disruptions in the supply chain.
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Credit Amount
Employee Retention (ERC) Credit is an income tax credit which businesses can claim in relation to wages that were paid during the COVID-19 Pandemic.The amount of the credit varies depending on the quarter and the number of employees a business has.
For 2020, a credit equal to 50 percent of wages paid to qualified employees is available up to a limit of $10,000.This means a company could receive up to a $5,000 credit per employee in 2020.
For the three first quarters of the year 2021, the credit is equal to 70% of the wages qualified to be paid. There is a limit of $10,000 per employee per quarter.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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Claim your 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 by Claiming it in Advance
Businesses have three options for claiming the ERC:
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.Businesses must submit Form 7200 to the IRS, Advance Payments of Employer Taxes and Credits.
- Businesses can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To do this, businesses must file Form 941 with the IRS and indicate the amount of the credit they are reducing their deposits by.
- 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 qualified wages by the credit rate applicable, the ERC can be calculated.Credit rates are 50% in 2020 and 70% during the first three-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 keep detailed records of all qualified wages paid to employees during the ERC period.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. Updated 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 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 any government orders that affected the business’s operations.
The IRS provides a variety of resources to help businesses claim the ERC, including FAQs, fact sheets, and videos.Businesses can contact the IRS by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses affected by the COVID-19 virus can claim an Employee Retention credit (ERC).These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants forced to close due to government orders
- Retail shops that have experienced a substantial decline 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 businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons & spas
- Retail stores selling non-essential goods
- Businesses that have been required to operate in a reduced capacity
- Businesses forced to comply with new safety protocols
- Businesses that have experienced an increase in costs as a result COVID-19
In addition to these examples, any business that was fully or partially suspended by a government order or that experienced a significant decline in gross receipts due to COVID-19 may be eligible for the ERC. Updated Employee Retention Credit
Below are some specific examples on how businesses have utilized the ERC.
- A restaurant that was forced to close for several months due to a government order was able to use the ERC to keep its employees on the payroll.
- The ERC was used by a retail store to offset payroll costs after it experienced a 50% drop in sales as a result 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.
- An organization that had seen its donations drop due to COVID-19 could use the ERC in order to keep their employees on the payroll and continue to offer essential 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 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, scammers try to take advantage businesses who 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
These warning signs will help you identify possible ERC scammers.
- They guarantee to refund your money without looking into your records.
- They charge you high upfront fees or a certain percentage of your refund.
- These salespeople use high-pressure tactics. Updated Employee Retention Credit
- They are not affiliated to a reputable organization of tax professionals.
- Your personal or financial data is requested 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.
You should also be careful to protect your personal and financial information.You should not provide your personal information to anyone contacting you 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
We have covered the Employees Retention (ERC) Credit in this article. This is a tax credit program that helps employers who qualify to retain their staff during the COVID-19 pandemic.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 offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the workforce.If you are eligible, we encourage to claim credit. Professional assistance may be needed if required.
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Employee Retention Credit: Frequently Asked Questions
Updated Employee Retention Credit
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
This credit is equal to 50% the wages paid by employees to qualified employees in 2020. And 70% of the wages paid by employees to qualified employees in their first three quarters in 2021.
Who can apply for the ERC program?
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 are qualified wages?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
Health insurance premiums paid by the employer are also considered qualified wages.
How do I claim ERC?
The IRS will accept amended Forms 941 and 941-X from businesses to claim the ERC.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I need to repay the ERC?
No, it is a refundable credit.
Can I claim ERC even if I have received a PPP Loan?
Yes, even if you have received a Loan Protection Program (PPP) for your business.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim the ERC?
Yes, the ERC is available to self-employed people.
Self-employed persons can claim ERC by completing Schedule C.
Can non-profit organisations 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 wages paid by foreign subsidiaries to their employees.
It is important to note that there are additional requirements for claiming the tax credit.
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
- The credit calculation is incorrect
- Inclusion of all eligible wages
- Failure to amend Form 941-X on time.