The COVID-19 epidemic has caused havoc in businesses of all sizes. Many have been forced to close or lay off their employees.But there is a lifeline available to help businesses stay 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.
The ERC can be very helpful to business owners who have been impacted. It will keep employees motivated and help your business stay afloat.If you want to know more about the ERC or how to claim it visit the IRS’ website, consult a tax advisor or continue reading 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 CreditYoutube 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.
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 the ERC created?
The COVID-19 pandemic triggered a severe economic recession, forcing many companies to layoff their employees or close down.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 can provide a significant financial boost to businesses that have been impacted by the pandemic.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. Youtube Employee Retention Credit
Impact of ERC on Business and the Economy
The ERC was able to keep millions of Americans working during the COVID-19 pandemic.It also helped companies to weather the economic storm and remain afloat.
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 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 main difference between the 2020 and 2021 ERC requirements is the gross receipts decline test.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 an enterprise must have seen a decline in gross revenue of atleast 20% in comparison to the same period 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 who have been ordered closed, to operate at a lower capacity, or to follow certain restrictions.
- Significant decline in Gross Receipts: An eligible business who has suffered a significant decrease in gross receipts as a result of COVID-19 may also be eligible for ERC.Significant declines in gross receipts are defined as a drop of at least 50% or 20% from the same quarter last year.
Example Scenarios
You can use the following examples to demonstrate each eligibility criterion.
Full or partial suspension by government order
- 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:
- A retail store that experiences a 50% decline in sales due to COVID-19 is eligible for the ERC.
- ERCs are available for manufacturers that cannot operate at their full capacity as a result of disruptions in supply chains.
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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 the credit is dependent on the business’s quarter and employees.
Credits for 2020 are equal to 50% the qualified wages paid by employees, up to a maximum amount of $10,000 per employee.For 2020, a business may receive a maximum credit of $5,000 per employee.
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 that a business could receive a credit of up to $7,000 per employee per quarter for the first three quarters of 2021, for a total of up to $21,000 per employee for the 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) on federal employment tax returns, businesses must file an amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.This form may be used for any quarter that the business is eligible for the credit.
Claim the ERC in Advance
Businesses have three choices for claiming ERCs:
- 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 reduce their quarterly deposits for employment tax by the amount they anticipate receiving.To reduce the deposits, businesses need to file IRS Form 941 and include the amount of credit that they expect to receive.
- Businesses who have already paid employment taxes may request a credit refund by filing IRS Form 941X.
Calculating the Amount of the Credit and Avoiding Double-dipping with Other Relief Programs
Multiplying employee wages with the applicable credit rate will give you the ERC.The credit rates for 2020 are 50% and 70% in the first 3 quarters of 2021.
Avoid double-dipping when it comes to other relief programs.Businesses cannot, for example, claim the ERC on wages they also claim as part of the Paid Family Medical Leave Credit and the Work Opportunity Tax Credit.
Tips and Resources for Recordkeeping and Documenation
Businesses must keep detailed records on all wages paid during the ERC.This will allow businesses to calculate accurately the amount of credit they are entitled to and support their claim in the event that it is audited. Youtube Employee Retention Credit
Here are a couple of tips to help you with your recordkeeping:
- Keep copies of all payroll records, including Forms 941 and W-2s.
- Keep track of the hours that employees work, including sick leave, vacation time, and holidays.
- 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 a number of resources that can help businesses claim their ERC. These include FAQs, factsheets, and videos.Businesses can contact IRS for help by calling 1-800-829-1040.
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Examples of Eligible Businesses
Businesses that have been affected by the COVID-19 Pandemic can apply for the Employee Retention Credit.The following are examples of businesses that may be eligible for the Employee Retention Credit (ERC):
- Restaurants closed due to government orders
- Retail stores which experienced a significant decrease in sales
- Due to disruptions in the supply chain, manufacturers are not able to operate at their full capacity
- Donations to nonprofit organizations have declined
- Hotels and hospitality businesses
- Travel and Tourism Businesses
- Entertainment and Event Businesses
- Personal care businesses
- Gyms, fitness studios
- Salons, spas
- Retail shops selling non-essential items
- Businesses that had to operate on a lower capacity
- Businesses who are required to implement new safety standards and protocols
- Businesses that experienced increased costs due to COVID-19
The ERC may also be available to businesses that were suspended or partially by government orders or experienced a substantial decline in gross revenues due to COVID-19. Youtube 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 store that experienced a 50% decline in sales due to COVID-19 was able to use the ERC to offset its 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.
If you are a business owner and you are unsure whether or not you are eligible for the ERC, I encourage you to contact a tax professional.They can help you to determine your eligibility and to claim the credit if you are eligible.
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Avoiding Scams
ERC Scams, Aggressive Marketing and Other Risks
Unfortunately, there are scammers who are trying to take advantage of businesses that are eligible for the Employee Retention Credit (ERC).These scammers can use aggressive marketing strategies to convince companies to sign-up for their services even when they are not eligible to receive the ERC.
Red Flags and Warning Signs
Here are some warning signals and red flags that can help you to identify ERC scammers.
- They will refund you without looking at your records.
- They charge high fees upfront or take a portion of your refund.
- Sales tactics are high-pressure. Youtube Employee Retention Credit
- They aren’t affiliated with an established tax professional association.
- You will be asked to provide your personal information or financial details upfront.
Reporting Suspicious Activities and Protecting Personal Information
If you are contacted by an ERC scammer, you should report the activity to the IRS.Call 1-800-829-1040 to report the scam or visit the IRS website.
Protecting personal information and financial data is equally important.Do not share your personal data with anyone who contacts 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 discussed the ERC eligibility requirements, claim process and potential scams.
We have also provided some tips and resources for recordkeeping and documentation.The ERC offers employers a valuable opportunity to reduce their tax liabilities, improve cash flow and support the 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
Youtube Employee Retention Credit
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 for ERC funding?
Eligible businesses include those who have seen a significant decrease in gross revenues or have been suspended fully or partly due to government orders resulting from the COVID-19 Pandemic.
What is a qualified wage?
Qualified wages include wages, salaries, tips, and bonuses paid to employees.
The employer’s health insurance premiums are also included in the calculation of wages.
How do I claim ERC?
Businesses can claim ERCs by filing amended Forms 941 or 941-X at the IRS.The amended 941-X form must be filed in three years following the original 941 filing date.
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?
Businesses can still claim the ERC if they have received a Paycheck Protection Program (PPP) loan.
Businesses cannot claim ERC for salaries that are also used as collateral to borrow PPP loans.
Can self-employed individuals claim the ERC?
Self-employed individuals can apply for the ERC.
Self-employed persons can claim ERC by completing Schedule C.
Can non profit organizations claim ERC?
Yes, non-profit organizations are eligible to apply for ERC.
Nonprofit organizations are eligible to claim the ERC when filing their Forms 990-T.
Can companies with a foreign subsidiary claim ERC?
Businesses can claim ERC for wages paid by foreign subsidiaries to their employees.
However, they must also meet certain additional requirements before they are eligible to claim the benefits.
What are the common mistakes businesses make when they claim ERC?
Some common mistakes businesses need to watch out for when claiming their ERC include but are not limited to
- Calculation error on credit
- Include all wages that qualify
- Failing to amend Forms 941-X within the specified timeframe.