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 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.
If you are a business owner who has been impacted by the pandemic, the ERC can help you keep your employees on board and your business afloat.For more information on the ERC and how to apply for it, you can visit the IRS site, talk with a professional 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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Employee Retention CreditWhen Will The Employee Retention Credit Be Paid
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.
The ERC is available to businesses of all sizes, including tax-exempt organizations.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 is able to provide significant financial support for businesses affected by the pandemic.It can be used to help businesses keep their employees, cover their payroll costs and invest for the future.
Why was 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 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
ERCs can give businesses impacted by pandemics a financial boost.It can assist in keeping employees on board, which will help the business recover quickly.
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. When Will The Employee Retention Credit Be Paid
Impact of ERCs on the Economy and Businesses
The ERC is credited with keeping millions of Americans at work during the COVID-19 outbreak.It also helped businesses weather the storm and stay afloat.
ERC may have prevented the closure of hundreds of thousands of businesses and saved over 10,000,000 jobs.It has also contributed towards the economic recovery through a boost in consumer spending and investment.
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Eligibility
The Employee Retention Credit (ERC) is a tax credit available to businesses that have been impacted by the COVID-19 pandemic. 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 test for a decline in gross receipts is the main difference between 2020 and 2021 ERC.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 must have experienced a significant decline in gross receipts of at least 20% compared to the same quarter in the previous year.
Business Qualifications
There are two ways that businesses can qualify for ERC:
- ERC is available to businesses that have been suspended in whole or part by government orders due to COVID-19.Businesses ordered to close, reduce capacity or comply with certain restrictions are eligible for ERC.
- Significant drop in gross sales: A business experiencing a significant loss in gross sales due to COVID-19 can also apply 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.
Examples and Scenarios
Below are examples and scenarios that illustrate each of the eligibility criteria:
Fully or partially suspended by a government order:
- A restaurant that is forced to close due to a government order is eligible for the ERC.
- 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 can be awarded to a retail store that has experienced a 50% decrease in sales because of COVID-19.
- ERC can be awarded to a manufacturer who cannot operate at full capability due to disruptions to the supply chain.
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Credit Amount
Employee Retention Credit is a tax deduction that businesses may claim on wages they paid employees in the COVID-19 pandemic.The amount of credit depends on the number of employees and the quarter.
In 2020, the credit will be equal to half of all wages that employees are entitled to receive up to $10,000.This means that a business could receive a credit of up to $5,000 per employee 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.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 ERC for Federal Employment Tax Returns
Businesses that wish to claim the Employee Retention credit (ERC), on their federal employment tax returns must use Form 941-X, Revised Employer’s Quarterly Tax Return, or Claim for Refund.This form is applicable to any quarter during which the business qualifies for the credit.
Claim the ERC in Advance
Businesses have three options for claiming 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 can reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To do so, businesses must fill out Form 941 at the IRS. They will need to indicate how much credit they intend to reduce.
- 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
Multiplying employee wages with the applicable credit rate will give you the ERC.The credit rate is 50% for 2020 and 70% for the first three quarters of 2021.
Businesses should be careful to avoid double-dipping with 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 Documentation
Businesses should maintain detailed records of the wages they paid to their employees during the ERC.This will enable the business to calculate the credit amount accurately and provide evidence to support the claim, if audited. When Will The Employee Retention Credit Be Paid
Here are some helpful tips on documenting your records and documents:
- Keep a copy of all records of your payroll, including the W-2 and Form 941.
- Keep track of the hours that employees work, including sick leave, vacation time, and holidays.
- Keep track of every wage paid to an employee, including the base salary, bonuses, and overtime.
- Track any government orders which may have an impact on the business.
IRS provides various resources, such as fact sheets and videos, to help businesses claim the ERC.Businesses can contact IRS for help 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).Below are some business examples that may be eligible for Employee Retention Credit.
- Restaurants closed due to government orders
- Retail stores which experienced a significant decrease in sales
- Manufacturers unable to operate at full capacity due to supply chain disruptions
- Donations of nonprofit organizations declined
- Hotels and other hospitality enterprises
- Travel and tourism business
- Entertainment and event businesses
- Personal care businesses
- Fitness studios and gyms
- Salons, spas
- Retail stores selling non essential goods
- Businesses that had to operate on a lower capacity
- Businesses that are forced to implement new safety protocols
- Businesses that experienced increased 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. When Will The Employee Retention Credit Be Paid
Here are some examples of how companies have used the ERC in specific situations:
- 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.
- A retail store that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its payroll costs.
- ERC was used by a manufacturer that could not operate at full capacity due to disruptions in the supply chain to keep employees employed and continue production of essential goods.
- 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.
If you own a company and are not sure if you are eligible, I recommend that you contact a qualified tax professional.They can help determine your eligibility as well as claim the credit for you if you’re eligible.
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Avoiding Scams
Risks of ERC Scams and Aggressive Marketing
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
These warning signs will help you identify possible ERC scammers.
- They guarantee to refund your money without looking into your records.
- They charge high fees upfront or take a portion of your refund.
- They use high-pressure sales tactics. When Will The Employee Retention Credit Be Paid
- They do not belong to an organization that is reputable.
- Some companies will ask for personal or financial details upfront.
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 do this by calling 1-800-829-1040 or by visiting the IRS website.
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 have any doubts about the legitimacy of a business, you can look at their online reviews or ask for help from 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 outlined the ERC’s eligibility requirements, its claim process, as well as the possible scams.
We’ve also included some resources and advice on recordkeeping.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 an eligible employer, we encourage you to claim the credit and seek professional assistance if needed.
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Employee Retention Bonus Frequently Answered Questions
When Will The Employee Retention Credit Be Paid
What is the ERC?
Businesses that have been affected by the COVID-19 epidemic can claim a refundable credit.
This credit is equal 50% of qualified wage paid to employees for 2020 and 70% qualified wage paid to employees during the first three-quarters of 2021.
Who is eligible for ERC funding?
Eligible companies for the ERC are those businesses that experienced a significant fall in gross sales or were partially or completely suspended because of government orders triggered by the COVID-19 outbreak.
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 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 must be submitted within three years from the original date of Form 941.
Do I have to repay my ERC?
The ERC does not require repayment by businesses. It is a tax credit that can be used to offset future taxes.
Can I claim the ERC if I received a PPP loan?
The ERC is available to businesses who have taken out a PPP (Paycheck protection Program) loan.
Businesses can’t claim ERC on wages they used for PPP loans.
Can self-employed individuals claim ERC?
Yes, individuals who are self-employed can qualify for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can non profit organizations claim ERC?
Yes, nonprofits are eligible for ERC.
Nonprofit organizations may claim the ERC by submitting Form 990-T.
Can companies with a foreign subsidiary claim ERC?
You can claim ERC on wages paid to 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?
When claiming your ERC; businesses must be aware of the following mistakes:
- Wrong calculation on credit
- Inclusion of all eligible wages
- Failure to amend Form 941-X on time.