15 EMPLOYEE RETENTION CREDIT FAQS

Numerous businesses in today's landscape continue to benefit from the credits offered by the Employee Retention Credit program. This program has provided a valuable refund mechanism, assisting companies in mitigating the financial losses they encountered during the challenging period of 2020 and 2021.

Even in the current year, businesses can still apply for the Employee Retention Credit through the submission of Form 941-X, an amended version of the Quarterly Federal Payroll Tax Return. This form is designed to cover the eligible quarters of a company's operations.

As we surpass the three-year mark since the introduction of the Employee Retention Credit, it is natural to have various inquiries regarding its functioning, the eligibility criteria, and other related circumstances. In order to provide comprehensive insights, we have curated a selection of frequently asked questions that delve into the intricacies of the Employee Retention Credit, ensuring that you have access to the most accurate and up-to-date information.H ere are the top 15 Employee Retention Credit frequently asked questions.

ERC FREQUENTLY ASKED QUESTIONS

Question #1: How does the Employee Retention Credit (ERC) function?

Answer: The Employee Retention Credit was specifically designed for employers to provide a refundable relief tax credit for payroll which can deliver significant financial benefits. In 2020, eligible employers can potentially receive up to $6,000 for each employee through this credit. The following year, in 2021, the maximum credit per employee substantially increases to an impressive $21,000. This credit serves as a valuable support mechanism, aiming to alleviate the financial burdens faced by businesses during these challenging periods.

Question #2: Which employers are eligible for Employee Retention Credit (ERC)?

Answer: The Employee Retention Credit is available to specific employers who meet certain criteria. Eligible employers include those who have faced partial shutdowns as a result of government orders restricting travel, commerce, or any group gatherings. Additionally, employers who have experienced substantial declines in their gross receipts in each quarter in comparison to their receipts in the corresponding quarters of 2019 because of the pandemic may also qualify. These qualifying conditions aim to assist businesses adversely affected by the pandemic and provide them with the opportunity to benefit from the ERC.

Question #3: What is a qualified wage for ERC and how is it determined?

Answer: ERC qualified wages play a crucial role in calculating the credits available to employers. These wages refer to the amount paid by eligible employers to their employees during the period of eligibility. In many cases, the tax credits provided through the ERC surpass the actual employer payroll tax numbers. It is worth noting that the benefits derived from the ERC can often exceed the financial assistance received by a company through the Paycheck Protection Program (PPP). This highlights the potential magnitude of the credits available under the ERC and underscores the significance of this program in supporting businesses.

Question #4: Do small and large employers receive equal benefits from Employee Retention Credit (ERC)?

Answer: The Employee Retention Credit offers varying benefits to small and large employers. Small employers enjoy enhanced advantages within the ERC program. During the period they qualify as an “Eligible Employer”, they have the opportunity to include paid wages to every employees when calculating their credits. Conversely, large employers only can include the wages paid to employees who weren't providing a service during that same qualifying period. This distinction recognizes the different circumstances and operational dynamics between large and small businesses, ensuring tailored benefits within the ERC framework.

Question #5: Does the Employee Retention Credit (ERC) apply exclusively to employees who are full-time?

Answer: Not at all. The ERC covers both full-time and part-time employees. Employers have the flexibility to include paid wages to employees in both categories when determining their eligibility for the credit. However, there is a restriction on credit calculations. Employers can only consider $10,000 of paid wages and health costs which were paid to every employee during every credit period for the purposes of determining the ERC. This ensures that the credit is applied within a specified threshold of wages and health plan expenses per employee, regardless of their employment status.

Question #6: What are the eligibility periods for generating credits in the Employee Retention Credit (ERC)?

Answer: If an employer meets the eligibility criteria, they can claim ERC for any paid qualified wage during specific periods. In particular, the ERC can be claimed for qualified wages paid in the year 2020, and also the first, second, and third quarters in 2021. These defined periods allow eligible employers to identify and include the applicable wages when calculating their credits under the ERC program.

Question #7: Is it still possible to apply for the Employee Retention Credit (ERC)?

Answer: Absolutely. The application window for ERC remains open for eligible employers. For 2020 ERC, April 15, 2024 is the statute of limitations date, which allows employers ample time to apply. Similarly, for the ERC 2021, April 15, 2025 is the statute of limitations date. These extended deadlines ensure that eligible employers have sufficient time to submit their applications and claim the benefits available within the Employee Retention Credit program.

Question #8: When I receive the Employee Retention Credit (ERC), do I need to include it as income?

Answer: No, you do not need to include the ERC as income. Instead, if you are an eligible employer for ERC purposes, you are required to reduce the deductions for wages on your income tax return for the corresponding tax year. This means that the ERC is utilized to offset the deduction for wages, rather than being treated as additional taxable income. This approach ensures that the ERC directly reduces the taxable income of the employer, providing a valuable benefit without impacting their overall income tax liability.

Question #9: Will I be required to repay the Employee Retention Credit (ERC)?

Answer: No, repayment is not necessary for Employee Retention Credit. The ERC tax credit is fully refundable which eligible employers can claim against particular taxes from employment. It does not function like a loan and therefore doesn't carry any repayment obligations. In fact, for many taxpayers, if the tax credit is exceeding the amount of paid payroll tax during eligible periods to generate credits, eligible employers can potentially receive a refund that surpasses their actual payroll tax liabilities, providing them with a valuable financial benefit without the need for repayment.

Question #10: What is the application procedure for Employee Retention Credit?

Answer: To initiate the application process for ERC, you must use Form 941-X and file tax return which is amended. This form should be submitted specifically for quarters in which your company met the “eligible employer” criteria. By completing and filing Form 941X for the relevant quarters, you can apply for the ERC and provide the necessary information and documentation to support your eligibility for the credit. It is essential to accurately fill out and submit the amended form to begin the application process for the ERC.

Question #11: After submitting Form 941X, how long should I expect my refund from the IRS to take?

Answer: Based on our observations and experience, the timeframe for receiving a refund from the IRS after filing an amended Form 941X is approximately 6-9 months. However, it is important to note that processing times can vary depending on various factors and circumstances. It is advisable to consult with the IRS or a tax professional for the most up-to-date information on refund timelines and any potential updates or changes in the processing duration for Forms 941X.

Question #12: Is it possible to receive both the Employee Retention Credit (ERC) and a Paycheck Protection Program (PPP) Loan?

Answer: Yes, it is possible to avail both the ERC and a PPP Loan simultaneously. However, certain considerations need to be taken into account. While any wages paid and funded by the PPP loan cannot be included in the calculation of the ERC, it's important to note that PPP funds typically cover 8-10 weeks of expense wages. On the other hand, the eligibility period for ERC extends for a longer duration. Additionally, PPP can be used to cover expenses beyond just wages.

It is essential to carefully assess and allocate PPP funds appropriately across the designated period. This ensures that wages funded by the PPP loan are not included in the ERC calculation. It is advisable to maintain clear records and documentation, ensuring proper delineation between the wages covered by the PPP loan and the wages eligible for the ERC. By effectively managing the interplay between the ERC and PPP Loan, businesses can maximize the benefits available under both programs.

Question #13: Is it necessary to apply for PPP forgiveness before filing for the ERC?

Answer: No, it is not mandatory to file for PPP loan forgiveness before applying for the Employee Retention Credit (ERC). However, if feasible, it is advisable to allocate the maximum allowable non-wage costs to the PPP loan that is being pursued for forgiveness. By doing so, you can optimize the utilization of non-wage expenses under the PPP program. This strategic allocation allows businesses to potentially maximize eligible wage amounts available for calculation under the ERC, enhancing the overall benefit derived from both programs.

Question #14: Are the terms ERC and ERTC referring to the same thing?

Answer: Yes, ERC stands for “Employee Retention Credit,” which is also known as ERTC, short for “Employee Retention Tax Credit.” These terms are used interchangeably to refer to the same program. The Employee Retention Credit (ERC) or Employee Retention Tax Credit (ERTC) was established through the Coronavirus Aid and Relief Act in 2020. This program aims to assist businesses in retaining their employees by providing refundable tax credits. Both ERC and ERTC serve as valuable mechanisms to support businesses and promote employee retention.

Question #15: Can I rely on my payroll system or CPA for all the necessary information regarding the Employee Retention Credit?

Answer: While your payroll system and CPA can provide valuable support, it's important to understand that the Employee Retention Credit (ERC) involves certain complexities that may require specialized expertise. The ERC encompasses various considerations, such as Controlled Group criteria, documenting qualification methodology, coordinating with PPP loans, and appropriately allocating healthcare expenses to the relevant time periods. These factors can impact the accuracy, optimization, and audit readiness of your claim.

Your payroll system may not have all the detailed information necessary for navigating the intricacies of the ERC, and your CPA may not possess the specific expertise required to address all the nuances of the program. To avoid potential pitfalls and ensure you are maximizing your benefits, it can be beneficial to engage ERC specialists who possess in-depth knowledge and experience. These specialists can guide you through the complexities of the program, helping you document processes, organize records, and mitigate any potential risks. By leveraging the expertise of ERC specialists, you can avoid potential disasters and ensure that you are not leaving any eligible funds “on the table.”