The COVID-19 pandemic has wreaked havoc on businesses of all sizes, forcing many to lay off employees or close their doors altogether.There is one lifeline that can help businesses remain afloat – the Employee Retention credit (ERC).
It is a refundable credit that can be claimed by employers on certain wages paid to employees in the event of a pandemic.It was designed to encourage businesses to continue to pay their employees even if normal operations are not possible.
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 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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The Employee Retention CreditWhat Is Employee Retention Tax Credit (Ertc)
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 created in March of 2020 by the Coronavirus Aid, Relief, and Economic Security Act to help employers keep their workers on the payroll, despite the fact that they may not have been able to operate normally.
The ERC is available to businesses of all sizes, including tax-exempt organizations.To be eligible for the ERC, a company must have had a significant fall in gross receipts and/or have been fully or partial suspended as a result of an COVID-19 government order.
The ERC can provide a significant financial boost to businesses that have been impacted by the pandemic.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was the ERC created?
The COVID-19 pandemic caused a severe economic downturn, forcing many businesses to lay off employees or close their doors altogether.The ERC’s purpose was to keep employees on the payroll so that businesses could quickly reopen their doors and resume normal operation once the COVID-19 pandemic had subsided.
ERC Benefits
ERCs can give businesses impacted by pandemics a financial boost.It can also be used to retain staff, which is important for a swift recovery.
The ERC can be claimed by businesses even if no taxes are due.Businesses can claim ERC for qualified wages paid to employees not working as a result of COVID-19. For example, employees are furloughed from work or quarantined. What Is Employee Retention Tax Credit (Ertc)
Impact of ERC on Businesses and the Economy
The ERC has helped to keep millions of Americans employed during the COVID-19 pandemic.It also helped companies to weather the economic storm and remain afloat.
It is estimated that the ERC has saved more than 10 million jobs, and prevented hundreds of thousands of businesses from shutting their doors.The ERC has also helped to boost consumer spending and investments, which have contributed to economic recovery.
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Eligibility
The test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.In 2020, the business must have seen a decline of gross receipts by at least 50% in comparison to the same quarter the year before.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
- 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 declines in revenue are defined as a decrease of at minimum 50% in 2020 quarters or at most 20% in 2021 quarters compared to same quarters the year before.
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 can be claimed by a restaurant forced to shut down due to an order from the government.
- 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 is available to retail stores that experience a 50% drop in sales as a result 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 of the credit varies depending on the quarter and the number of employees a business has.
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 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 filed for any quarter in which the business was eligible for the credit.
Claim the ERC in Advance
Businesses can claim the ERC in three ways:
- Claim it in advance. Businesses are able to claim the credit before the quarter’s end by reducing quarterly employment taxes.For this to happen, businesses will need to submit IRS Form 7200 – Advance Payment of Taxes and Employer Credits.
- Businesses can also reduce the quarterly employment tax deposit by the amount that they expect to get.Businesses must submit Form 941 to the IRS, indicating the amount they want to reduce their deposit by.
- Businesses can ask for a refund if they have already paid the employment tax. They should file Form 941-X at the IRS.
Calculating the Credit Amount and Avoiding Double-dipping with Other Relief Programs
The ERC is calculated as the product of the employee’s qualified wage multiplied by the applicable credit rates.Credit rates are 50% in 2020 and 70% during the first three-quarters of 2021.
Businesses should avoid double-dipping on 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 should keep detailed records detailing all qualified wages paid by employers to employees over 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 Is Employee Retention Tax Credit (Ertc)
Here are some tips on recordkeeping and documentation.
- All payroll records should be kept, including W-2s and Forms 941s.
- Keep track of all hours worked by employees, including vacation, sick, and holiday time.
- 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 offers many resources for businesses to claim the ERC. This includes FAQs and fact sheets.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).Following are some of the businesses that might be eligible to receive the Employee Retention Credit.
- Restaurants are forced to close by government order
- Retail stores that saw a significant fall in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations for nonprofit organizations are down
- Hotels and other hospitality business
- Travel and tourism companies
- Entertainment and event business
- Personal care businesses
- Gyms & fitness studios
- Salons and spas
- Retail stores that sell non-essential products
- Businesses that had to operate on a lower capacity
- Businesses that are forced to implement new safety protocols
- Businesses who experienced higher costs due to 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. What Is Employee Retention Tax Credit (Ertc)
Here are some examples that show how businesses have used ERCs:
- 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.
- 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.
- ERC allows a company to maintain its workforce and produce essential products despite being unable to run at full capacity.
- A nonprofit organization that saw its donations decline due to COVID-19 was able to use the ERC to keep its employees on payroll and continue to provide essential services.
If you are an owner of a business and are unsure as to whether you are eligible for ERC, then I would encourage you contact a tax specialist.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, there are scammers that try to take advantage business owners who are eligible for Employee Retention Credits (ERC).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).
Red Flags and Warning Signs
Here are some warning signs and red flags to identify potential ERC scammers:
- They will refund you without looking at your records.
- You will be charged high fees upfront, or a percentage of your refund.
- High-pressure sales tactics are used. What Is Employee Retention Tax Credit (Ertc)
- They do not belong to an organization that is reputable.
- They ask for your personal or financial information upfront.
Reporting Suspicious Actors and Protecting Your Personal Information
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.
Also, you should be cautious about protecting your financial and personal data.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
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 explained the eligibility requirements, the claiming process, and the potential scams related to the ERC.
We have also provided tips and resources on recordkeeping and documentation.The ERC is a valuable benefit that can help employers reduce their employment tax liability, improve their cash flow, and support their workforce.We encourage eligible employers to claim this credit and, if necessary, seek professional help.
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Employee Retention Bonus Frequently Answered Questions
What Is Employee Retention Tax Credit (Ertc)
What is ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable 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 can receive the ERC?
Eligible business for the ERC includes those who suffered a significant reduction in gross receipts due to government order caused by COVID-19.
What is a qualified wage?
The wages that qualify as wages include salaries, wages, tips, and bonuses.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim the ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended Form 941-X must be filed within three years of the date the original Form 941 was filed.
Do I have to repay my ERC?
The ERC, however, is a non-refundable tax credit.
Can I claim ERC even if I have received a PPP Loan?
Yes, businesses can claim the ERC even if they received a PPP loan (Paycheck Protection Program).
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim ERC?
Self-employed individuals can apply for the ERC.
Schedule C is the form that self-employed people can use to claim their ERC.
Can nonprofit organizations claim ERC?
Yes, nonprofit organizations are eligible for the ERC.
Nonprofits may claim ERCs on their Form 990T.
Can companies that have a foreign subsidiary claim ERC benefits?Can companies who have a foreign branch claim ERC?
Yes, businesses can claim the ERC for wages paid to employees of foreign subsidiaries.
It is important to note that there are additional requirements for claiming the tax credit.
Are there common mistakes that businesses make when claiming ERC to watch out for?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Incorrect credit calculation
- The failure to include all qualifying wages
- Failing to amend Forms 941-X within the specified timeframe.