The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.But there is a lifeline available to help businesses stay afloat: the Employee Retention Credit (ERC).
The ERC is a refundable tax credit that businesses can claim on qualified wages paid to employees during the 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 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 CreditWhat Does Employee Retention Credit Mean
Employee Retention Tax Credit (ERC), also known as the Employee Retention Tax Credit, is a refundable tax credit that employers can claim for qualifying wages paid to their employees during COVID-19.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.
Businesses of all sizes can apply for the ERC, even those that are tax-exempt.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 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 a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.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 is a great way to boost the finances of businesses affected by pandemics.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 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 Does Employee Retention Credit Mean
Impact of ERC on Businesses and the Economy
The ERC kept millions of Americans employed throughout the COVID-19 epidemic.It also helped businesses weather the storm and stay afloat.
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 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 test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.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, 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
Businesses can qualify for the ERC in two ways:
- 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.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 receipts: A business that has experienced a significant decline in gross receipts due to COVID-19 is also eligible for the ERC.A significant decline in gross receipts is defined as a decline of at least 50% in a quarter in 2020 or at least 20% in a quarter in 2021 compared to the same quarter in the previous year.
Example Scenarios
The following are some scenarios and examples that will help you understand each eligibility criteria.
Fully or partially suspended by a government order:
- ERC is available to restaurants that are forced to close by a government order.
- 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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- 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 credit amount varies according to the quarter and number of employees of a business.
For 2020, the credit is equal to 50% of qualified wages paid to employees up to a maximum of $10,000 per employee.This could mean that an employer can get a credit up to $5,000 for 2020.
Credits are equal to 70% of qualified wages for the first 3 quarters of 2020, with a maximum per employee of $10,000.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 the 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 be submitted for any quarter where the business was entitled to the credit.
Options for Claiming the ERC in Advance
Businesses have three options to claim the ERC.
- Claim credit in advance. Businesses can claim credit in advance by reducing their quarterly deposits for employment tax.To do so, businesses need to file IRS Form 7200, Advanced Payment of Employer credits and taxes.
- Businesses may also reduce their quarterly tax deposits on employment by the credit amount they expect.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 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
The amount of the ERC is calculated by multiplying the qualified wages paid to employees by the applicable credit rate.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Avoid double-dipping when it comes to other relief programs.For example, businesses can’t claim the ERC if they are also claiming the Paid Family Leave Credit or 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 enable businesses to accurately determine the amount of credit that they are eligible for, and to back up their claim should it be audited. What Does Employee Retention Credit Mean
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 at all times of employee hours, including vacation, sick and holiday leave.
- Keep track of all the wages that employees receive, including overtime, bonuses, and base wages.
- Keep track of all government orders that 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 that are affected by COVID-19 can receive the Employee Retention (ERC).These are some examples of businesses who may qualify for the Employee Retention Credit.
- Restaurants forced to shut down due to government order
- Retail stores that saw a significant fall 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 companies
- Entertainment and event businesses
- Personal care businesses
- Gyms & fitness studios
- Salons, spas
- Retail stores that sell non-essential products
- Businesses that were required to operate at a reduced capacity
- Businesses that were forced to implement new safety measures and protocols
- Costs incurred by businesses as a result of 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 Does Employee Retention Credit Mean
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.
- 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.
- A nonprofit organization whose donations declined due to COVID-19 used the ERC to retain its employees and continue providing essential services.
Contact a tax expert if you’re a business owner who is unsure if you qualify for the ERC.They can assist you in determining your eligibility, and claiming the credit, if you qualify.
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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 use aggressive marketing to convince businesses to subscribe to their services even if that business isn’t eligible for the Employee Retention Credit (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 fees upfront or take a portion of your refund.
- These salespeople use high-pressure tactics. What Does Employee Retention Credit Mean
- They are not affiliated with a reputable tax professional organization.
- The first thing they ask you for is your personal and financial information.
Reporting Suspicious Activity and Protecting Personal Data
If you are contacted by an ERC scammer, you should report the activity to the IRS.You can report this activity by calling 1-800-829-1040.
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 want to know if a particular business is legit, check online reviews. Or 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 eligibility requirements, claiming processes, and possible scams related the ERC.
We have also provided some tips and resources for recordkeeping and documentation.ERCs are a valuable tool that employers can use to lower their employment tax liability and improve their cash flow. They also help support their 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
What Does Employee Retention Credit Mean
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 is eligible to apply for ERC?
Eligible businesses for the ERC include those who experienced a significant decline in gross receipts or were fully or partially suspended due to government orders caused by the COVID-19 pandemic.
What are qualified wages?
Salary, wages, bonuses, and tips are all considered to be wages.
All wages that are qualified include health insurance premiums paid to the employer.
How do I claim ERC?
The IRS allows businesses to claim ERCs if they file an amended Form 951, or Form 951,-X.The amended 941-X form must be filed in three years following the original 941 filing date.
Do I need to repay the ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC even if I have received a PPP Loan?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
Businesses cannot claim the ERC for wages that were also used to claim the PPP loan.
Can self employed individuals claim ERC benefits?
Yes, you can get the ERC if you are a self-employed individual.
The Schedule C can be used by self-employed individuals to claim the ERC.
Can non profit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies that own a foreign affiliate claim ERCs?
You can claim ERC on wages paid to foreign subsidiaries.
Before you can get it, however, you must meet some additional requirements.
Are there common mistakes that businesses make when claiming ERC to watch out for?
You should be on the lookout for these common mistakes when businesses claim their ERC.
- Incorrect credit calculation
- Include all wages that qualify
- Failing to amend Forms 941-X within the specified timeframe.