The ERC Scheme is essential for employers to understand to maximize potential savings. So, what is ERC? The Employment Retention Credit, or ERC, is an incentive created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is designed to help employers reimburse certain expenses associated with keeping employees on the payroll or even hiring and paying new employees when businesses have experienced revenue losses due to the coronavirus pandemic.
To be eligible, employers must:
- Be subject to an order of full or partial suspension of normal business operations due to a governmental order related to COVID-19;
- Experience a major decline in gross receipts during the implicated calendar quarter compared to the same calendar quarter in the prior year.
- have no more than 500 employees.
- pay their employees during the period the credit can be claimed.
The ERC equals 50% of qualified wages per employee, up to $5,000. The total credit is limited to $10,000 per employee for all calendar quarters in 2020. Making a new retirement plan is not required to qualify for the ERC. Employers who decline to take advantage of other payroll tax deferrals available through the CARES Act are still eligible for the ERC.
How to Calculate the Credit
Employers can calculate the Employee Retention Credit using the following formula:
ERC = (Employee wages paid* X Number of employee hours not worked* X Payment rate * X Credit rate).
How to Claim the Credit
After getting the answer to what is ERC, it is vital to know how to claim it. The ERC is claimed as part of your quarterly payroll tax filing. Employers eligible for the ERC can claim the credit on their Form 941, Employer’s Quarterly Federal Tax Return. The IRS has provided an Employee Retention Credit guide to assist employers in the claim process and in determining eligibility.
If the employee’s eligibility for the Employee Retention Credit exceeds the employer’s payroll tax liability, the excess amount may be refunded as an advance. An application must be submitted to the Internal Revenue Service to receive the advance. Eligible employers are given an interest-free loan, as the advance must be repaid when the employer files its annual payroll tax return or when an amended or adjusted return is filed. The IRS may also allow the employer to carry forward the unpaid balance of the credit up to five years after the conclusion of the calendar year in which the credit was first taken.
Effect on Other Credits
The ERC allows employers to take advantage of other credits and deductions. The ERC is nonrefundable and does not reduce the employer’s payroll taxes to below zero, so it won’t reduce the amount of other credits that can be claimed.
Advantages of the ERC
Many people keep asking what is ERC and how it can benefit me. Here are some of the advantages that come with this incentive:
The ERC puts money back into the pockets of businesses as they try to rebound from the pandemic. This financial relief can make all the difference in keeping operations running and employees employed.
Bonus Tax Credit
In addition to the financial relief businesses get from the ERC, they can also get a bonus tax credit equal to 50% of the qualified wages paid during the taxable year, up to $5,000 for each employee. This further supports businesses in their recovery efforts.
The ERC helps employers retain existing employees and encourages them to hire new employees when businesses experience revenue losses. This keeps companies running, as well as prevents unemployment.
The ERC scheme provides employers with increased flexibility when hiring or retaining employees. The credits can be used to offset the employer’s payroll taxes, which can then be used to pay employees their wages or to cover other costs associated with hiring and retaining employees.
The ERC scheme incentivizes employers to hire new or retain existing staff by providing them with an additional credit for certain wages paid. This extra credit can offset the employers’ payroll tax liability.
The ERC scheme also helps to reduce costs for employers as the credits can be used to minimize the amount of payroll taxes owed. This helps reduce an employer’s tax burden, allowing them to reallocate their limited resources toward other aspects of their business.