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.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
The ERC allows businesses to claim a tax credit on wages paid during a pandemic.It’s designed to help employers keep their employees, even if the business is unable to function normally.
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 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 CreditWhat Are The New Rules For Employee Retention Credit?
Employee Retention Credit (ERC) is a tax credit for businesses that can be claimed if they pay employees wages 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 are available to all businesses, even tax-exempt ones.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.
ERCs can be a major financial boost for companies that have suffered from pandemic effects.The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.
Why was the ERC created?
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
ERC can be a major financial boost for businesses who have been affected by the pandemic.It can also help businesses retain their employees, which is essential for a quick 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. What Are The New Rules For Employee Retention Credit?
Impact of ERC on Business 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.
ERC was estimated to have saved 10 million jobs and prevented thousands of businesses from closing.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.In order to qualify for the 2020 ERC, businesses must have had a substantial decline in gross revenues of at least half compared with the same quarter last year.In 2021, a business must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
Business can qualify in two ways for the ERC
- ERC eligibility for businesses suspended or suspended partially by a government.Businesses that are required to close down, operate with a reduced capacity or adhere to certain restrictions can be eligible for the ERC.
- 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 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
Here are some examples and scenarios to illustrate each eligibility criterion:
An order of the government may suspend all or part of a program.
- ERC may be available for a restaurant that has to close because of a government directive.
- A gym that is required to operate at a reduced capacity due to a COVID-19-related government order is eligible for the ERC.
Significant decline in gross receipts:
- ERC can be awarded to a retail store that has experienced a 50% decrease in sales because 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
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 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.This could mean that an employer can get a credit up to $5,000 for 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 three-quarters of 2021, a business can receive up to $7,000 in credit per employee. This could amount to up to $21,000 for each employee.
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Claim your Credit
How to Claim the ERC when Filing Federal Employment Tax Returns
Businesses must amend Form 941X, Adjusted Employer’s Quarterly Federal Income Tax Return or Claim For Refund, to claim the Employee retention credit (ERC) in federal employment tax returns.This form can also be filed for any other quarters in which a business may have been eligible for credit.
Claim the ERC in Advance
Businesses can claim the ERC in three ways:
- 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.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- 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.Credit rate is set at 50% for 2020 and 70% for the three first quarters of 2021.
Businesses should be aware of the dangers of double-dipping.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 Documentation
Businesses must keep detailed records on all wages paid during the ERC.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. What Are The New Rules For Employee Retention Credit?
Here are some helpful tips on documenting your records and documents:
- Keep a record of all your payroll documents, such as W-2 forms and 941s.
- 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 any orders from the government that may affect your business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can call the IRS at 1-800-829-1040 for assistance.
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Examples of Eligible Businesses
Businesses impacted by COVID-19 are eligible for the Employee retention credit (ERC).Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail stores who experienced a significant drop in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations to nonprofit organizations have declined
- Hotels and hospitality businesses
- Travel and tourism businesses
- Entertainment and event business
- Personal care businesses
- Gyms and fitness studios
- Salons, spas
- Retail stores selling non-essential goods
- Businesses that were required to operate at a reduced capacity
- Businesses forced to adopt new safety protocols and measures
- Businesses that have experienced an increase in costs as a result COVID-19
ERCs may be awarded to any business, including those that were fully or partially closed by a government order and/or experienced a significant decrease in gross receipts because of COVID-19. What Are The New Rules For Employee Retention Credit?
Here are some examples of how companies have used the ERC in specific situations:
- A restaurant, which was forced to close due to an order from the government for a period of several months, was able use the ERC in order to keep their employees on the payroll.
- A retail outlet that suffered a 50% sales decline due to COVID-19, was able to use ERC to offset their payroll costs.
- The ERC allowed a manufacturer who was not able to operate at its full capacity because of supply chain disruptions to continue producing essential goods and keep their employees on the payroll.
- 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.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.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, scammers try to take advantage businesses who qualify for the Employee Retention Credit.These scammers may use aggressive marketing tactics to try to convince businesses to sign up for their services, even if the business is not eligible for the ERC.
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- They promise to get you a refund without reviewing your records.
- They charge high upfront fees or a percentage of your refund.
- They use high-pressure sales tactics. What Are The New Rules For Employee Retention Credit?
- They are not members of a reputable professional tax organization.
- They ask for your personal or financial information upfront.
Reporting Suspicious Activity and Protecting Personal Data
If you’re contacted by an ERC con artist, then you should report their activity to IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting personal information and financial data is equally important.Never give out personal information to someone who contacts you without your permission.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
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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible 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 are an eligible employer, we encourage you to claim the credit and seek professional assistance if needed.
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Frequently Asked Questions about Employee Retention Credits
What Are The New Rules For Employee Retention Credit?
What is ERC?
Businesses affected by COVID-19 can apply for a refundable income tax credit.
This credit is equal to 50% of qualified wages paid to employees in 2020 and 70% of qualified wages paid to employees in the first three quarters 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 are qualified wages?
Salary, wages, bonuses, and tips are all considered to be wages.
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 Form 941 X must be submitted within three years from the original date of Form 941.
Do I have to pay back the ERC?
No, the ERC is a refundable tax credit, which means that businesses do not need to repay it.
Can I claim the ERC if I received a PPP loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
The ERC cannot be claimed for wages used to obtain a PPP loan.
Can self-employed individuals claim the ERC?
Yes, you can get the ERC if you are a self-employed individual.
Self-employed persons can claim ERC by completing Schedule C.
Can non-profit organisations claim ERC?
Nonprofit organizations can apply for the ERC.
Nonprofits can claim ERC on Form 990 T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch 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 mistakes that companies make in claiming ERCs?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- The credit calculation is incorrect
- Inclusion of all eligible wages
- Failure to amend Forms 901-X by deadline