Recent changes in the tax legislation have brought significant modifications to Section 3134 of the Internal Revenue Code. The passage of the Infrastructure Investment & Jobs Act (IIJA) in 2021 has resulted in a revision that impacts Employee Retention Credit, specifically pertaining to wages received prior to October 1, 2021. This adjustment aims to support employers in their recovery efforts.
To elaborate further, Employee Retention Credit offers a valuable opportunity in the form of a refundable tax credit. This credit equals 50% of the qualified salaries paid to employees by eligible employers between March 12, 2020, and January 1, 2021, during designated calendar quarters. Employers who fulfill the necessary criteria can promptly access the maximum credit by reducing their employment tax payments or contributions.
Moreover, in cases where an employer's payroll tax payments fall short in covering the credit, the IRS may provide an advance payment. This provision ensures that businesses can benefit from Employee Retention Credit even if their existing payroll tax payments are insufficient. If you are seeking to claim the Full-Time Employee Retention Credit (ERTC) offered by the Internal Revenue Service, this comprehensive guide will equip you with the essential information and guide you on the path to becoming a qualified company.
The following concepts are key to your understanding of Employee Retention Credit (ERC):
1. Criteria for Eligibility: Gain insights into the essential requirements that determine eligibility for Employee Retention Tax Credit (ERTC) and the specific timing considerations involved.
2. The Claiming Process: Learn the systematic approach to successfully filing an ERTC claim, starting from organizing fundamental business information to gathering relevant financial data.
3. The Timeline: Explore the designated period within which you can claim the ERTC, as well as the optimal timing strategies to maximize your benefits.
4. Obtaining the Credit: Uncover the process of submitting your application and ultimately receiving the ERTC, including estimated timelines and effective techniques that yield favorable outcomes.
5. Reporting Requirements: Acquire knowledge on accurately reporting the ERTC on your federal tax return and efficiently tracking the status of your official refund.
INTRODUCTION ON THE ERC APPLICATION
Employee Retention Credit offers a valuable opportunity to businesses facing financial challenges. This credit allows for employers who are eligible to claim a 50 percent credit on wages, including certain health-plan costs, not exceeding $10,000 per employee. It serves as a lifeline for struggling organizations, providing relief through reduced future contributions or advance payment options via Form 7200, commonly known as the Advance of Employee Credits Due to COVID-19. The credit can be applied to wages paid before March 12, 2020, opening doors for much-needed financial assistance.
Those qualifying for the tax credit include: Various types of employers, including tax-exempt not-for-profit entities, must meet specific criteria. These criteria encompass operating a trade or business in 2020 while falling into one of these categories:
Experiencing a partial or full suspension of operations during any calendar quarter due to government-imposed orders that hindered commerce, travel, or gatherings in response to the COVID pandemic.
Demonstrating a substantial decline in overall gross receipts, indicating the adverse impact of the pandemic on the organization's financial health.
Experiencing a steep decline in overall gross receipts that occurred abruptly, creating a challenging economic environment for the business.
Eligibility is determined by comparing a company's total revenue on the first day of the initial calendar quarter of 2020 to that of the corresponding quarter of 2019. If the revenue falls below 50 percent, the employer meets the eligibility requirements. But remember, this MUST be included in the ERC refund application.
Once the significant decline in overall gross sales ceases, it is measured by comparing gross receipts to the same quarter of 2019. If the gross receipts exceed 80 percent, the eligibility period concludes.
Employee Retention Credit provides a much-needed refundable credit that can be utilized for eligible wages incurred during the specified period. Additionally, it covers wages paid in other calendar quarters when operations were suspended, along with certain health-plan expenses for businesses facing financial distress.
Qualifying wages depend on the number of employees employed by an eligible firm. If a company had an average of more than 100 employees (full-time) in 2019, qualified wages typically include earnings (not to exceed $10,000 per employee) paid to employees who were unable to provide services due to the suspension of operations or a significant reduction in gross receipts.
It's important to note that employers in this category can only consider wages up to the amount an employee would have earned for performing a similar amount of work during the 30 days preceding the economic downturn.
Qualified wages encompass all amounts paid to any employee during the period of suspended operations or when Social Security taxes were not withheld. This includes health care costs, with a maximum limit of $10,000 per employee. Later in the article we will discuss what this all looks like on the ERC application form.
CAN I FILE A CLAIM FOR THE EMPLOYEE RETENTION CREDIT?
Due to the direct impact of COVID-19, you have the opportunity to claim a tax benefit and Employee Retention Credit (ERC) for providing paid time off to your employees. However, it's important to note that you cannot use two credits for the same wages, and paid leave compensation cannot be considered when determining qualified salaries for the ERC. It is crucial to distinguish between the two.
Please be aware that salary payments made using grant funds, such as a restaurant revitalization fund (RRF) grant, cannot be used to qualify for the ERC. However, until 2023, you may utilize grant funds for other business expenses apart from salaries, which can significantly maximize the potential benefits of the ERC.
If you have obtained a PPP loan, it is possible to file for ERC tax credit. In the initial stages of the CARES Act, you had to make a decision between claiming the credit or applying for a PPP loan.
However, if you have received approval for debt forgiveness on your PPP loan, you are not eligible to claim a refund for wages covered by the loan. On the other hand, if your request for debt forgiveness is denied, you can utilize the wages paid with the PPP loan to claim the employer portion of the ERC.
Businesses and tax-exempt organizations have the opportunity to utilize this credit for any employee during any calendar quarter of 2020 or 2021. However, certain conditions must be met, including:
Experiencing a complete or substantial cessation of business operations during any calendar quarter of 2020 or 2021 due to government regulations that restrict commerce, service availability, or gatherings as a result of COVID-19.
Demonstrating a significant decline in overall gross revenues during a calendar period of 2020 or 2021.
Many businesses were compelled to suspend operations that were not essential for the preservation or protection of lives in March 2020. If your business had to substantially alter its operations to comply with these regulations, such as a complete or partial discontinuation of operations, it is likely that you are eligible for the ERC.
For example, temporarily closing in-house restaurant services and transitioning to takeout only would be considered a partial cessation of operations. Completely discontinuing operations entails temporarily closing all divisions of your company in compliance with the regulations.
HOW TO APPLY FOR EMPLOYEE RETENTION CREDIT?
Employee Retention Tax Credit (ERTC) offers businesses the opportunity to deduct the credit from their Social Security taxes, and in most cases, the excess amount is refundable.
Qualified businesses are allowed to retain an equivalent amount of wage and salary taxes that would have been typically submitted, including federal income taxes, Social Security taxes, qualified health care expenses, and the employer's share of Medicare, Social Security, and health coverage taxes for all employees, up to the account balance. This can be done without incurring penalties, with the intention of making a claim for the credit.
Tax-exempt organizations and eligible recovery-starting enterprises can utilize Form 7200, the Advance of Employee Credits Due to COVID-19, to request an advance of Employee Retention Credit.
Here are some additional considerations and provisions that may impact an eligible employer's ability to claim Employee Retention Credit:
Employers who have received an Economic Injury Disaster Loan (EIDL) through the CARES Act's Paycheck Protection Program are not eligible for Employee Retention Credit.
The credit for medical and paid family leave under IRS code, Section 45S cannot be applied to wages used for calculating Employee Retention Credit.
Using the ERC, eligible businesses can deduct federal employment taxes paid from March 13, 2020, until September 30, 2021.
Companies that are at risk of ceasing operations due to a governmental order related to COVID-19 or have experienced a significant decline in revenue—50% or more in 2020 and 20% or more in 2021 compared to 2019—are eligible for the credit.
For the entire year of 2020 and each eligible quarter in 2021, employers can claim ERC at a maximum of $5,000 for each employee.
Did you miss out on claiming the credit in 2020? You may still meet the eligibility requirements! The credit can be applied retroactively.
ADDITIONAL DETAILS FOR CLAIMING ERC
Companies that want to claim Employee Retention Credit are required to submit Form 941-X, Modified Employer's Quarterly Federal Tax Returns or Request for Refund, for the applicable quarter(s) in which the eligible wages were paid, in order to obtain the credit for the previous quarter. The IRS provides three illustrative examples to demonstrate the process.
IRS Notice 2021-20 outlines seven options for how a company that received Paycheck Protection Program (PPP) funds determines which wages, if any, qualify for ERC. The determination largely depends on how the eligible wages were reported on the PPP loan forgiveness application.
In exceptional cases, the eligible payroll costs reported on the application for PPP loan forgiveness and the employment tax deposit can be used as eligible wages. The IRS may consider the eligible costs and wages of full-time employees below the poverty line to support debt relief.
On the other hand, the IRS clarifies that eligible expenses for PPP loan forgiveness that were not included in the initial forgiveness request can be added later. To maximize the available benefits under ERTC, it is essential to include all qualifying expenses on the PPP loan forgiveness application, especially non-payroll costs such as utilities, partial suspension, and operational costs.
For each quarter, eligible employers must report their total eligible wages on Form 941, Employer's Quarterly Federal Tax Return, which is used for reporting employment taxes to the government.
Additionally, employers must report any eligible paid leave for families or sick leave compensation for which they are entitled to the Families First Coronavirus Response Act (FFCRA) credit on Form 941. To fund qualifying wages in advance and support cash flow, eligible employers can access federal employment taxes, such as tax withholdings from payroll cycles that need you will need to pay back to the IRS.
To expedite the tax process, you can utilize Form 7200, Advance Credit Payments of Employee Credits, to receive a partial credit from the IRS for the portion of the credit that federal employment taxes cannot cover due to COVID-19.
For each calendar period in which you qualify, you should report your eligible wages and corresponding credits on Form 941-X, Adjusted Employer's Quarterly Federal Tax Return, and Claim for Refunds.
If you have already applied for the credit and received the benefit, your annual income should reflect the credit on your tax return. In such cases, you may need to submit updated tax returns. After completing your 2021 tax season returns, you can apply for the credit.
YOUR OPTIONS TO APPLY FOR ERC GRANT
Do you prefer to handle your taxes independently or would you benefit from additional assistance? When it comes to applying for Employee Retention Credit (ERC), you have the choice of either applying on your own or enlisting the services of an ERC expert.
OPTION 1: APPLYING ON YOUR OWN
If you opt to apply for the ERC independently, completing the ERC form manually is recommended for the best chance of receiving the credit. Here are the advantages and disadvantages of computing, submitting, and receiving the ERC credit without professional assistance:
Pros:
- Cost-effective compared to hiring an experienced professional.
- Application forms and free guidance are readily available.
Cons:
- Higher potential for errors due to lack of expertise.
- Risk of underestimating the ERC refund, leading to financial loss.
- Time-consuming process and potential hassle.
- Increased stress and concerns about making mistakes.
The IRS has introduced Form 941-X specifically for small businesses seeking to accurately amend their 2020 and 2021 tax returns and claim the eligible ERC refunds. Given the numerous changes the ERC has undergone, especially in 2021, understanding the eligibility criteria and calculating the ERC can be complex and time-consuming.
Several websites, including the official IRS website, offer guidance and step-by-step methods that you can follow. Additionally, ERC calculators are available on various public platforms. However, it is important to note that the outcomes obtained from different sources may vary.
OPTION 2: APPLYING VIA AN ERC SPECIALIST
While it is possible to apply for the ERC credit independently, opting to hire an accountant or utilizing the services of a reputable ERC funding provider can save you time and ensure accuracy. Applying with an ERC firm offers several benefits, but it also comes with certain drawbacks:
Pros:
- Reduces the time required to complete all the paperwork.
- Ensures greater accuracy in data and final submission.
- Provides peace of mind, knowing that experts have taken care of all the details.
- Increases the likelihood of maximizing your refund.
Cons:
- Involves a higher overall cost.
- Sharing private data with a third party entails some level of risk.
If you decide to seek professional assistance, there are various options available. You can collaborate with a reputable accountant or engage a business with extensive experience in ERC funding to calculate your ERC refund and file your Form 941-X.
Financial and lending institutions like Omega Accounting Solutions offer assistance to entrepreneurs with their ERC applications. These service providers often work in conjunction with a team of experts specializing in the complex realm of ERC claims.
By hiring an expert, you will have less workload, receive guidance at every step, and gain confidence knowing that the proper documents will be submitted, even as requirements and procedures continue to evolve.
For more options, you can explore our curated list of top ERC service providers.
While there are potential drawbacks to employing a professional, it is essential to consider them. It may go against your company's strategy or personal preferences to pay someone else to perform a task you could handle yourself. Additionally, entrusting your application to another individual means relying on their level of diligence and attention to detail.
Despite these minor drawbacks, it is worthwhile to incur the additional cost to ensure that you do not miss out on potentially significant refund credits due to an error on a form. When there are thousands of dollars at stake, the investment in professional assistance becomes a prudent choice.
ERC FORM
Employers affected by qualifying disasters can utilize Form 941-X to file for Employee Retention Credit. In cases where an eligible employer's business becomes inoperable due to significant loss resulting from a qualifying disaster, the business owner may be eligible to claim an ERC credit equal to 40% of a maximum of $6,000 in qualified wages paid to or incurred for each qualified employee.
For businesses impacted by qualifying disasters, there are two additional credits that can be added to employee retention credit for the current year:
- The qualified disaster worker credit for the years 2018 and 2019.
- The retention credit.
Employee Retention Credit was established through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It provides assistance to employers in retaining employees on their payroll, starting from its enactment in March 2020. Both the CARES Act and subsequent legislation have modified and extended the credit and its provisions through 2021.
Under the ERC, small and midsize businesses can claim up to a 50% credit of eligible wages paid between March 13 and December 31, 2020. This category includes employers who have received funding through the Paycheck Protection Program (PPP).
With the Consolidated Appropriations Act (CAA), the tax benefit for eligible wages paid in 2021, including certain healthcare costs, is increased to 70%. The credit is capped at $10,000 in compensation per individual for the first two quarters of 2021.
CAN I STILL FILE FOR ERTC?
The expiration dates for most businesses were retroactively changed to October 1, 2021, as per the Infrastructure Investment & Jobs Act (IIJA) passed by Congress in November 2021.
However, only newly recovered businesses can access the funding between October and December 2021.
A recovery startup business is a company which:
– Commenced operations on/after Feb 15, 2020.
– Has annual gross sales of under one million dollars.
If you meet the requirements, you can retroactively apply for the ERC in 2020 or 2021 by submitting a revised Form 941-X. The IRS allows a three-year window from the date of your original return filing or two years from the date of payment receipt to submit an amended federal employment tax return.
The IRS's delays have been a source of frustration for taxpayers and professionals over the past couple of years, but given the circumstances, there is little that can be done. Currently, the IRS has a significant backlog of several hundred thousand revised Form 941 filings due to Employee Retention Credit guidelines released in the summer of 2021.
With a global pandemic, logistical and supply chain challenges, and labor constraints, it is difficult to predict when IRS personnel will complete the pending filings.
Given the extended wait times and the volume of unprocessed correspondence, taxpayers understandably seek clarity regarding the timeline for receiving their refunds.
According to the most recent information provided by the IRS, previously submitted revised Forms 941 may result in refund issuance between six and ten months from the date of reporting. Refunds may take as long as sixteen weeks or even longer to reach those who have already filed or registered.
Additional review processes required for significant refunds (exceeding $1 million) may result in significant delays.
IS THERE A WAY TO APPLY FOR ERC RETROACTIVELY?
Starting in 2021, employers have the opportunity to apply for a 70% credit as part of Employee Retention Tax Credit (ERTC). The maximum qualifying compensation per employee per quarter has been increased to $10,000, providing a boost compared to the previous year.
Small businesses can take advantage of these additional benefits offered by the ERC before it expires.
In the following section, we will guide you through the process of applying for the ERC. We have developed a straightforward application process, so let's get started to start reaping the benefits.
Step 1: Gather Your Relevant Business Information
The ERC credit incentive is available to all businesses based in the United States, although not all businesses will qualify. Therefore, it is important to consult with your accountants or CPA to determine your business's eligibility for this employee benefit.
Step 2: Collect Payroll Data
After gathering your data, you will need to gather the necessary employee payment information. This includes:
Identifying employees who meet the requirements for the ERC tax credit and ensuring they receive the credit for their wages.
Step 3: Compile all PPP Loan Documentation
Next, you will need to collect any PPP loan documentation, which includes:
- The date the PPP loan was approved.
- The loan amount received through the PPP.
Utilize the PPP loan documentation to calculate the amount of ERCs you can acquire.
If you have not received a PPP loan, you can proceed to step 4 as this part does not apply to you.
Step 4: Gather 2019 Data for All Full-Time Employees
You must compile a list of all full-time employees who worked in 2019. For each employee, gather their full-time job information and contact details from 2019.
Step 5: Obtain the 2019 & 2020 Sales Revenue Figures
To complete the ERTC application, you will need to collect the sales revenue figures from 2019 through 2020. Your net income or loss, along with other relevant factors, will determine the amount of the retention credit you are eligible to receive.
FINAL THOUGHTS
Good news! You can now pursue Employee Retention Tax Credit (ERTC) even if your company has received a Paycheck Protection Program (PPP) loan. However, it's important to note that if you have already applied for and received approval for PPP loan forgiveness, you cannot utilize the ERTC for wages covered by the PPP loan. On the other hand, if your application for PPP loan forgiveness was declined, you have the opportunity to claim the ERTC using the wages you paid with the PPP loan.
Given the complexities involved in assessing eligibility and accurately calculating the refund amount your business is entitled to, it is highly recommended to seek professional assistance with the ERC. With the intricate nature of the process, having expert guidance can be invaluable.