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The Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act ) was signed into law on March 27, 2020. It included two programs to assist businesses with keeping workers employed: the Payroll Protection Program (PPP) administered by the Small Business Adminstration and Employee Retention Tax Credit (ERTC) administered by the Internal Revenue Service.
PPP funds are distributed based on 2.5 months of payroll and a minimum of 80% of the funds must be used on payroll to be eligible for forgiveness. Additionally, PPP funds are not taxable as revenue and you may still take deductions for the payroll covered by PPP.
ERTC tax credits, however, are credits (or refunds) for a percentage of payroll in each quarter that you qualify. There are specific rules for determining eligibility by quarter, and limiting the dollars that can be claimed for each employee.
Employer eligibility is largely determined by one of two key factors, at least one of which must apply in the calendar quarter the employer wishes to utilize the credit: Full or partial closure due to a government order. A business is eligible for the ERC if they were forced to fully or partially suspend operations (FPSO) or reduce business because of a government COVID-19 order. Credit applies only for the part of the quarter the business is suspended, not the entire quarter. There are certain businesses that generally do not meet this description and would not qualify:
Those considered essential, unless they have supply of critical material or goods disrupted in a manner that affects their ability to continue to operate. Businesses shuttered but continuing their operations largely as normal (telework). A significant decline in gross receipts
For tax year 2020, the business must have seen a 50 percent drop in gross receipts when comparing a quarter in 2020 with the corresponding quarter in 2019.Beginning in 2021, businesses must have seen more than a 20 percent drop in gross receipts in Q1 and Q2 compared to the same quarter in 2019. A new business is allowed to use gross receipts for the quarter in which it started business as a reference for any quarter in which it did not have 2019 figures.
Qualified wages are compensation paid by an employer to some or all FTE’s in the relevant quarter. Qualified wages include the employer’s qualified health plan expenses that are allocable to the wages.The ERC is applied to employer’s contribution to Social Security & Medicare taxes and is fully refundable. In order to claim ERC, you must calculate total qualified wages and the related health insurance costs for each quarter, and retroactively claim the credit through Form 941-X.
The Million Dollar Question is . . . Do They Have The Time?
So far, we have not found a bookkeeper who is able to take all this on, while handling the day-to-day of bookkeeping. If yours can, then take them up on their offer. We’re happy to take a second look.
The rules are different depending on how many employees you have. The updated 2021 program bumped these categories up from 100 full-time employees (FTE’s) in 2019 to 500 FTE’s in 2019. Employers with 500 or fewer FTE’s in 2019 can apply the ERC towards all qualified wages paid to employees during those quarters, whether or not employees were working at the time. Employers with more than 500 full-time employees can apply the ERC towards qualified wages paid to employees who were not working during a quarter because the business suspended operations or had a significant decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Initially with the CARES Act, employers could choose to apply for PPP or claim ERTC credits, but not both.
PPP was more beneficial than ERTC for most businesses (for reasons we won’t go into here) and so most businesses with under 500 employees received forgivable PPP Loans.
On March 11, 2021, The American Rescue Plan Act of 2021 was signed into law and included many modifications and expansions to existing elements of previous stimulus programs.
Noteworthy modifications for business owners included:
So the short answer is “Yes” . . . you can claim ERTC even if you received PPP funds.
Unlike the Payroll Protection Program (administered by the Small Business Administration), there is actually no “application process” for the Employee Retention Tax Credits.
You simply claim the ERTC tax credit like you would any other tax credit – by asserting to the IRS that you can legally claim the credit.
When you claim a child tax credit, you do so by asserting this fact on your Form 1020 Personal Income Tax Return.
The difference is that when you claim an ERTC tax credit, you do so on your Form 941 Employer Quarterly Tax Filing.
For prior quarters, you must file an amended form (the Form 941-X) to reduce your current quarter’s tax contribution and request a refund of excess credits (which is highly likely).
Another perk of ERTC, is that since you can often estimate these credits in advance of distributing cash for payroll, you can file a Form 7200 to receive a cash advance to avoid waiting until the end of the quarter to apply for the refund.
Even though you may feel like revenue is back to normal, there are some items you want to consider before passing on this ERTC assessment.
First, even if revenues have returned to “normal” in 2021, you may have qualified in 2020 and you can retroactively claim those credits. That eligibility criteria in 2020 was based on revenue declines from 2019, or if your business was partially or fully closed due to governmental mandate.
Second, while your revenue may have returned to “normal” in Q1 2021, remember that we are comparing your Q1 2021 to Q1 2019. If 2019 was a year of growth for your business, then your revenue levels 2 years ago may have been much less than Q1 2020.
And lastly, if your revenues were down in Q4 2020 by just 20% compared to Q4 2019, then you may also be eligible for Q1 2021. There is a safe harbor provision that few advisors are talking about, and it means that many businesses are qualifying for $7,000 per employee in Q1 2021.
I know, it seems too good to be true, but the government wants to incentivize and reward you for keeping US residents employed and money flowing through our economy as we rebuild bigger and stronger than before.
You are most likely referring to a provision of the CARES Act that allowed employers to defer the deposit and payment of the employer’s share of Social Security taxes. Those deferrals must then be repaid – with at least 50% of the balance due by 12/31/21 and the remaining balance due by 12/31/22.
ERTC credits are NOT a deferral. They are dollar-for-dollar credits against wages you’ve paid. Not taxes you’ve paid, but actual wages.
These credits can offset future tax contributions or you can receive a refund check – it’s your choice.
And you will NOT have to re-pay these funds (unless, of course, you don’t provide adequate documentation in the course of an audit).
Your banker was probably very helpful when it came to getting your PPP funds because they were effectively signing you to an SBA-guaranteed loan. The SBA paid the bank administrative fees based on the PPP loans they made, and so they were incentivized to educate you about the program and get all your paperwork in order.
Compared to the ERTC, the PPP program was also a rather simple calculation. 2 ½ times your average monthly payroll including health insurance and state unemployment taxes.
From the conversations we’ve had with bankers, they have no interest in involving themselves in your employment tax compliance. For them it is a liability and beyond their scope of services.
Whether your tax accountant is a CPA or EA, he or she most likely only prepares your Federal and State Income Tax Returns. However, ERTC credits are claimed against Employment Taxes on Form 941, and cash advanced through Form 7200.
The complexity of the ERTC program is a beast unto itself and every tax accountant we’ve talked to has said they focus on staying up-to-date on the ever-evolving income tax code, and they can’t now become experts in the ERTC program as well.
If your tax accountant is comfortable determining your eligibility by quarter and year, computing your credits, and preparing contemporaneous documentation to support an IRS audit, then you should certainly let them handle all of this.
If you want a second set of eyes on this, we’re happy to take a look.
Your Payroll Service does an excellent job of executing the fundamentals of paying your employees, paying your employment taxes and filing your quarterly reports.
But computing your ERTC credits requires visibility into your P&L and PPP forgiveness applications. Not only that, but the complex requirements around eligibility and allocating ERTC credits at the employee-level while accounting for annual and quarterly qualifying wage gaps and . . . well, you can probably tell why Payroll Services are not offering to do all of this for you.
The Payroll Services that we’ve worked with so far are happy to provide the payroll registers that we need to perform the allocations. And they are happy to file the Amended Form 941-X with the IRS on our client’s behalf.
But that’s the extent of it.
In fact, most wise Payroll Services are asking clients to sign an indemnification waiver before submitting a Form 941-X because the Payroll Service can take no responsibility for the accuracy of the ERTC credits you are claiming.
For them to involve themselves in the intricacies of this calculation, it is a liability and beyond their scope of services.
The IRS issued these warnings, as there are many fly-by-night, so-called ERC “experts” or “consultants” that are misrepresenting their experiences and the parameters of the ERC program to employers. The ERC is a complicated tax program that requires deep expertise and understand of the nuances. When choosing an ERC company look for companies with a proven real track record and watch out for red flags (e..g, large upfront cost, no CPAs or tax professionals on staff)
“The IRS Audit period for ERC is:
3 years for 2020 and Q1,Q2 of 2021
5 years for Q3 of 2021 “
Unlike a loan or other form of business funding, the Employee Retention Credit (ERC) is a fully refundable tax credit that does not come with limitations on how it can be spent. As a result, businesses that qualify for the ERC can choose to spend their refund in any way they see fit.