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.The Employee Retention Credit can be a lifeline for businesses struggling to stay afloat.
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.
If you own a small business and have been affected by the pandemic then the ERC will help you to keep your staff on board, as well as your business going.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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Employee Retention CreditVirginia Employee Retention Credit Subtraction
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.
ERCs are available to all businesses, even tax-exempt ones.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.It can assist businesses in retaining their employees, covering payroll costs, as well as investing in their 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 aims to help companies keep their staff on the payroll in order to quickly reopen after the pandemic is over.
ERC Benefits
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can also be used to retain staff, which is important for a swift recovery.
The ERC, which is a tax credit that is claimed even by businesses who do not owe a dime in taxes, is refundable.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. Virginia Employee Retention Credit Subtraction
Impact of ERCs on the Economy and Businesses
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.The ERC has helped many businesses stay afloat during the COVID-19 pandemic.
ERC saved 10 million jobs. Thousands of businesses were prevented from closing.It has also contributed to the economic recovery by boosting 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 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 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
There are two ways that businesses can qualify for 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 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
Below are examples and scenarios that illustrate each of the eligibility criteria:
Fully or partially suspended by a government order:
- ERC may be available for a restaurant that has to close because of a government directive.
- ERC may be available for a gym which is forced to operate at reduced capacity by a COVID-19 government order.
Significant decline in gross receipts:
- ERC may be available for a retailer that suffers a drop of 50% in sales caused by COVID-19.
- 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 credit (ERC), a tax-credit that businesses can claim, is for wages paid to qualified employees during the COVID-19 epidemic.The amount of credit depends on the number of employees and the quarter.
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.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 your Credit
How to Claim the ERC on 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.
Options for Claiming the ERC in Advance
Businesses have three options to claim the ERC.
- Claim your credit in Advance: Businesses can take advantage of the credit by reducing deposits made quarterly for employment tax.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.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- 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 Amount of the Credit 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%.
Avoid double-dipping when it comes to other relief programs.For example, businesses cannot claim the ERC for wages that are also used to claim the Paid Family and Medical Leave Credit or the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documenation
Keep detailed records for all wages that were paid to employees in the ERC period.This will help businesses to accurately calculate the amount of the credit they are eligible for and to support their claim if it is audited by the IRS. Virginia Employee Retention Credit Subtraction
Here are some tips for recordkeeping and documentation:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- Track all employee wages, including bonuses, overtime, and base pay.
- Track any government orders which may have an impact on the business.
The IRS offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.Businesses can also contact the IRS for assistance by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).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 shops that have experienced a substantial decline in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Non-profit organizations who saw their donations decrease
- Hotels and hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms & fitness studios
- Salons and spas
- Stores that sell non-essential merchandise
- Businesses that had to operate on a lower capacity
- Businesses forced to comply with new safety 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. Virginia Employee Retention Credit Subtraction
Here are a few examples of specific ways businesses have used their ERC:
- An employee of a restaurant forced to close down by government order for a few months was able to continue to be paid through the ERC.
- 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.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, 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
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 high upfront fees or a percentage of your refund.
- The salespeople are aggressive and use high-pressure tactics. Virginia Employee Retention Credit Subtraction
- They are not affiliated to a reputable organization of tax professionals.
- Some companies will ask for personal or financial details upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
You should contact the IRS if you receive a call from an ERC scammer.You can call 1-800-829-1040 for more information or go to the IRS web site.
Protecting personal information and financial data is equally important.You should not provide your personal information to anyone contacting you 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
In this article, we have discussed the Employee Retention Credit (ERC), a tax relief program that helps eligible employers keep their employees on payroll during the COVID-19 pandemic.We have explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
Also, we have provided some resources and tips for documenting and keeping records.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and 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 Credit: Frequently Asked Questions
Virginia Employee Retention Credit Subtraction
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 is eligible for 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 are qualified wages?
Included in qualifying wages are wages, salaries, and tips paid to employees.
Also, health insurance premiums that employers pay are considered wages.
How do I claim the ERC?
Businesses can claim the ERC by filing an amended Form 941 or Form 941-X with the IRS.The amended form 941-X is required to be filed within 3 years from the date that the original Form 941 has been filed.
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?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self-employed individuals claim 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 organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies that own a foreign affiliate claim ERCs?
You can claim ERC on wages paid to foreign subsidiaries.
There are a few additional requirements to meet before you can claim the benefit.
Are there any common mistakes made by businesses when claiming ERC that they should be on the lookout for?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Incorrect credit calculation
- Inclusion of all eligible wages
- The failure to amend Form 941-X in time.