ERC 1-2-3 – The Employer Retention Credit
If you’ve spent anytime online as a business owner, you have been bombarded with solicitations from new companies looking to help you cash in on the recent covid-19 legislation promising up to $26,000 for each employee. The question is, “is it true?”.
The short answer is YES.
In response to the government shutdown and health pandemic beginning in 2020, the Cares Act initiated a new tax credit for companies who kept their employees on the payroll during the pandemic when layoffs were extraordinarily high, and the government was subsidizing unemployment. Initially, the distinction was up to 50% of qualified wages paid to your employees, with a maximum credit of $5,000 per employee for 2020.
Subsequent legislation amended and extended the credit into 2021 and increased the maximum credit per employee to $7,000 per employee PER Quarter.
Yes! You read that correctly.
$7,000 per employee per quarter through September 30, 20201. Qualifying businesses, this means another $21,000 credit per employee for 2021. So adding the 2020 maximum of $5000 per employee, it is possible to qualify for the $26,000 per employee maximum.
Since this credit is new and very short-term, it has not caught the attention of many long practicing professionals like myself. Initially, I quickly redirected clients and prospects to their payroll companies when asked about it. Over and again, they would tell me either they did not qualify, or their payroll company did not provide that as a service.
I decided to dig a bit into the legislation for purposes of providing clarity for myself on whether my clients qualified and, if not, why not. I found a maze of legislation regarding the initial ruling, changes, amendments, and updates enough to make the best CPA fall asleep. I can’t even imagine how the average payroll clerk has any hopes of understanding whether it even applies to their clients.
With that, my team and I decided to get ahead of this credit to ensure that our clients and others who reach out to us can access this refundable credit while it is still available.
Take a look at a few key points below and give us a call if we can help you claim your refund.
Who is a Qualifying Employer for the ERC or ERTC?
A qualifying employer is any employer operating a trade, business, or tax-exempt organization. For the 2020 credit, government organizations are excluded from the qualifications. However, subsequent expansions included them under specific circumstances.
Furthermore, by this definition, an employer that withholds applicable payroll taxes and files the required Forms 944 or 941 forms to report and pay withheld taxes. 1099 Contractors are not considered under this definition of employment.
Additionally, the employer must meet one of the following criteria related to the pandemic:
- Experienced full or partial suspension of operations due to a Covid-19 government order during any quarter of 2020 (this applies for many non-essential businesses that were subjected to stay-at-home orders by the governor, mayor, or county official, etc.), or
- Experienced a significant decline in gross receipts.
- For 2020, the significant decline begins in the quarter where gross receipts are less than 50% or the same calendar quarter of 2019 and ends in the calendar quarter following the quarter where gross receipts are greater than 80% or the same quarter in 2019.
- For 2021, the significant decline in gross receipts requirement is met when the gross receipts are less than 80% of the same calendar quarter of 2019.
- For “Recovery Startup” businesses beginning after February 15, 2020, that do not meet any of the above qualifications and have average annual gross receipts under $1,000,000:
- They automatically qualify for the credit for the 3rd and 4th Quarters of 2021.
- The maximum credit allowed is $50,000 per quarter.
How much is the ERC credit, and how is it computed?
For qualifying employers, the credit is as follows:
- For 2020, is 50% of qualifying wages up to $10,000 per year ($5,000 max per employee)
- For 2021, the credit is 70% of qualifying wages up to $10,000 per quarter ($7,000 max per employee per quarter)
How long do I have to claim my refund for the ERC Credit?
The credit is claimed on your payroll tax forms, either at the time of filing or as an amendment. You have up to three years from the return due date to claim a refund. So the first cutoff date for claiming this credit is April 2023, for the first quarter of 2020.
Can a sole proprietor or single member LLC qualify for the ERC Credit?
Yes, sole proprietors and single-member LLCs qualify if they have W2 employees and meet the other qualifying employer requirements.
Can essential businesses that were not required to shut down qualify for the ERC Credit?
Yes. Fully or partially shut down is only one of the criteria applicable to this credit. It is possible that essential businesses experienced a reduction in gross receipts that would qualify them in one or both years. Additionally, there is the possibility that essential businesses may have been impacted by other businesses in their supply chain that was shut down, causing them a reduction in their ability to deliver products and services.
What should I do to claim my credit?
To claim your credit, you must amend your 941 payroll tax forms by filing form 941-X. It is critical that you are clear on whether or not you qualify and for how much.
Our firm currently provides an independent ERC Study for each client to determine the following:
- Are you a qualified employer?
- Did you pay qualified wages to W2 employees?
- Which employees must be excluded, if any, from the credit determination?
- How much credit is applicable for each employee (by quarter)? (The rules are different for each quarter and each year)
- Under which paragraphs of the four governing legislations do you qualify?
- And lastly, we document your file with the necessary supporting documents and positions to support your positions should you be audited on credit.
Once the study is complete, we have determined you qualify. We will complete the necessary claim forms for submission and request the applicable refunds for each quarter independently.
Additionally, our fees include our Power of Attorney being active on your account to monitor and ensure your claim is in process and identify and resolve any issues promptly.
When should I expect to receive my refund for the ERC credit?
That is dependent on the processing time and efficiency of the IRS. At the time this blog was drafted, the timeframe span from 5 months to around 12 months for most businesses. However, as more companies become aware of this credit, you can expect that time to be expanded due to the number of requests.
Our recommendation is to submit your claims as soon as possible for two reasons: 1) the statute of limitations under which you can receive a refund is only three years, with the first expiration April of 2023, and 2) the sooner your claim is filed, the sooner you can expect payment.