EMPLOYEE RETENTION TAX CREDIT

COVID-19 FINANCIAL RELIEF: Everything You Need To Know

Employee Retention Tax Credit – Basics

Less well-known than the PPP, the ERTC has the potential to be the second largest source of financial relief to businesses during COVID-19.
WHAT IS THE ERTC?

The ERTC was introduced by the CARES Act and then amended by both the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA). Today, more employers can qualify for this refundable and advanceable credit, including those who also received a PPP loan and loan forgiveness.

WHAT PERIOD OF TIME DOES THE ERTC COVER?

Eligible businesses (rules vary at different time periods) may claim the ERTC for qualifying ages paid during March 13, 2020 through December 31, 2021. This includes a partial Q1 2020, then full quarters for the rest of 2020, and Q1, Q2 and Q3 of 2021.

HOW MUCH IS THE CREDIT WORTH?

The maximum credit for 2020 was $5,000 per employee. Note: If your business is willing to file amended returns for 2020, you might still have the opportunity to claim this credit. See the Tax Filings & Receiving Funds section The CAA and ARPA extended the ERTC to apply to Q1, Q2 & Q3 of 2021. Congress also expanded the amount of the credit. Businesses can claim 70% of the first $10,000 in qualified wages for each employee in Q1, Q2 & Q3 of 2021, or up to $21,000 per employee during 2021.

WHEN WILL THE PROGRAM END?

The ARPA extended the ERTC to tax year 2021, so wages paid from January 1, 2021 through September 30, 2021 are eligible for the credit. Ammended returns are allowed to be processed for up to 3 years.

More than 30,000 small businesses have claimed more than $1 billion with ERTC.

SOURCE: THE WHITE HOUSE

Eligibility Rules

PPP LOAN STATUS

Under CARES, if a business had applied for and received a PPP loan, it could not also receive ERTC. However, the CAA and ARPA changed that to allow businesses to take advantage of both programs. You cannot claim ERTC for employee wages that were paid using PPP loan funds.

COMPANY SIZE

Under CARES (for tax year 2020), eligible businesses were limited to those with 100 or fewer employees.

You need only count the number of full-time workers you employed in 2019, not during 2020 or 2021.

The CAA expanded eligibility to businesses with 500 or fewer employees, so larger employers became eligible for the credit in tax year 2021. See the Calculating the ERTC section for more detail

Calculating the ERTC

DETERMINE QUALIFIED WAGES

To calculate ERTC, you must first determine the qualifying wages you can apply. These are regular wages that would not be disqualified for double-dipping with PPP, FFCRA or RRF. Wages count only if they apply to the U.S. federal payroll (FICA) tax. According to the IRS, for employers with 100 or fewer full-time employees, qualified wages include both pay and health care costs (up to $10,000 per quarter per employee) paid to any employee during a period in which operations were suspended, disrupted or there was a substantial decline in gross receipts.

The IRS recently released these clarifications on qualified wages in Guidance 2021-49:

Tips

Tips received by an employee in a calendar month greater than $20 can be included in qualified wages. This could be important for restaurants and other establishments with tipped employees. Make sure you have documentation of tips.

Wages paid to relatives of majority shareholders

To add to the confusion, “Wages paid to a majority owner’s spouse, child, sibling, step-sibling, parent, step-parent, niece, nephew, aunt, uncle, son-in-law, daughter-in-law, or individual who shares a home with the majority owner are not qualified wages.”

Wages paid to majority shareholders

Tips received by an employee in a calendar month greater than $20 can be included in qualified wages. This could be important for restaurants and other establishments with tipped employees. Make sure you have documentation of tips.

Hiring bonuses

Money used for hiring bonuses to attract qualified employees can count as eligible wages for ERTC.

CALCULATE CREDITS

Multiply qualified wages (up to $10,000 per employee) by 50% for eligible quarters in 2020. The maximum amount you can receive per employee is $5,000 for the year. Multiply qualified wages (up to $10,000 per employee, per quarter) by 70% for Q1, Q2 & Q3 in 2021. The maximum amount you can receive per employee is $7,000 per quarter or $26,000 per year. Next, we’ll present some decision trees you can use to more easily determine your company’s eligibility for ERTC for quarters in 2020 and 2021.

Job searches for companies offering hiring or signing bonuses increased 134% since the beginning of 2021.

SOURCE: INDEED HIRING LAB

ERTC Decision Tree for 2020 Quarters

ERTC Decision Tree for 2021 Quarters

Optimizing Your Credit

Optimize ERTC by understanding the interplay between COVID-19 business relief programs and carefully avoiding double-dipping to maintain compliance.

Businesses can claim ERTC even if they have also participated in PPP loans, FFCRA paid-leave credits, and/or a Restaurant Revitalization Fund grant. However, it’s critical not to double-dip (or triple or quadruple) when calculating eligible wages. Employers who double-dip can face costly penalties. Let’s examine strategies for maximizing your company’s ERTC while staying in compliance with all of the rules.

PAYCHECK PROTECTION PROGRAM (PPP) & ERTC

The CARES Act did not allow any business receiving a PPP loan to claim the ERTC. However, the CAA and ARPA revised that policy. Now you can claim both, but you must meet two criteria:

1. Any PPP loan money you used to pay wages or healthcare expenses must be excluded from
qualified wages you apply to your ERTC. If you pay someone a wage and take that amount for PPP forgiveness, you may not apply for ERTC on that portion of wages.

2. At least 60% of PPP loan funds must be spent on payroll costs in order to qualify for full PPP loan forgiveness. The remaining 40% can be spent on other qualified expenses. For first-draw PPP eligible expenses predominantly meant mortgage interest or rent, and utilities. Fortunately, seconddraw PPP greatly expanded the list of eligible nonpayroll costs to include:
• Mortgage interest or rent
• Rent/lease payments on real or personal property in service before 2/15/2020
• Utilities
• Worker protection (PPE, ventilation, barriers, expansion of outdoor spaces)
• Covered supplier costs, mostly for perishable goods inventory
• Covered property damage costs that were not reimbursed by insurance
• Operations expenses such as: software, cloud computing, product/service delivery costs, HR, sales & billing, accounting or tracking of supplies, inventory, records and expenses, and payroll processing expenses.

HOW TO OPTIMIZE ERTC

Many business owners are tempted to assign 100% of PPP funds to wages, in order to ensure they more than met the 60% threshold for loan forgiveness. This can be a costly mistake. Instead, try to use other qualified expenses for the full 40% of your seconddraw PPP funds. This leaves a greater amount of qualified wages you can use for ERTC.

FFCRA PAID LEAVE TAX CREDIT & ERTC

The Families First Coronavirus Relief Act of 2020 (FFCRA) allows employers that voluntarily provide workers with up to 80 hours paid sick leave or expanded FMLA for COVID-19 to receive payroll tax credits. This voluntary program for employers covers an employee who is:
• Under a government or health department quarantine order or isolation order
• Advised by a health care provider to self-quarantine
• Has COVID-19 symptoms and is seeking a diagnosis

 

 

 

 

 

 

 

The U.S Department of Justice Fraud Section attorneys have already prosecuted more than 100 defendants for PPP fraud.

Source: DOJ

Employers must pay the employee’s regular rate or applicable federal minimum wage (if higher). The fully refundable tax credit received by the employer is subject to a cap of $511 per day and $5,110 in the aggregate. Additionally, paid family leave qualifies for FFCRA tax credit if an employee.

• Is caring for an individual subject to quarantine order or doctor’s advice to quarantine.
• Caring for their child is school or care facility has closed due to COVID-19.
• Is experiencing any other similar circumstance specified by the U.S. Department of Health and Human Services.
• In these last three cases employers are required to pay sick leave at 2/3 of the employee’s rate, up to $200 per day for up to 12 weeks days- $12,000 in the aggregate.

ARPA extended the availability of FFCRA leave credits through Q2 and Q3 of 2021. It also changed the credit from going against Social Security tax to a credit against Medicare tax. Leave credits are ineligible for the tax credit if they were used as qualified wages for PPP, SBA Small Loan, Restaurant Revitalization Fund grant, or a grant under the Economic Aid to Hard-Hit Small Businesses.
HOW TO OPTIMIZE ERTC

Carefully consider with your tax advisor where tax credits benefit your business the most. You cannot claim ERTC on any wages that you received FFCRA leave credits. However, you will only have leave credits on a limited number of employees and can certainly use wages from employees who did not take any eligible leave for ERTC. ERTC credits apply to wages starting in March 2020, whereas FFCRA credits do not apply until leave taken starting April 1, 2020 or later, providing a one-month window without any potential conflicts.

RESTAURANT REVITALIZATION FUND & ERTC

Restaurants faced a particularly perilous business environment during the pandemic. Most spent at least part of 2020 under government shutdown orders, either completely closed or serving only takeout/delivery food. After that, most restaurants found themselves reopening under another set of government restrictions limiting restaurant capacity. So, it is no wonder that these small businesses need more financial recovery help than nearly any other industry.

Tax Filings and Receiving Funds

Learn how to file for ERTC and the methods that you can receive the funds.
DOCUMENTATION

You will need to gather and preserve documentation proving your ERTC claim for 4 years. Documentation should include:
1. Copies of full or partial shutdowns orders from government authorities includes capacity limits.
2. Records (financial statements) showing significant decline in gross receipts for all quarters ERTC was claimed.
3. Documentation of wages paid in 2020 and 2021 as well as the number of full time employees in 2019.
4. Documentation showing how you determined the amount of wages and/ or qualified health plan expenses allocated to PPP vs. ERTC vs. FFCRA vs. RRF.

2020 RETROACTIVE CREDITS

If your business was eligible for ERTC in 2020 but you failed to claim the credit, there is still time to file amended tax returns. Use Form 941X to amend your return and claim the credit up to three years from the date of your original Form 941 filing.

41% of small business owners say they’re currently experiencing rising wage costs.

SOURCE:CNBC

3 WAYS TO RECEIVE FUNDS

In anticipation of filing Form 941 at quarter-end, you can work with your payroll provider to lower your weekly or bi-weekly payroll tax deposits by your eligible ERTC.

When you file Form 941 and claim your ERTC each quarter, check your credit against the tax deposits you made during the quarter. If there is an ERTC left, the IRS will send you a refund.

If the reduction in payroll tax deposits does not cover the amount of your credit, and your business has less than 500 full-time employees, you may file Form 7200 to receive an advance refund from the IRS. This can be filed more than once in a quarter, but avoid filing it too close to your Form 941.

Top 4 Myths About ERTC

In 2021, you can apply for both PPP loan forgiveness and ERTC. What you cannot do is claim ERTC on the same wages you’ve used for PPP forgiveness. Remember, you can use other expenses for up to 40% of PPP forgiveness, leaving more qualifying wages for ERTC. Your employee retention tax credits also do not have to come from a single sequential block of time.

Your business does not have to have shut down to show an economic impact from COVID-19, so you can be eligible with no shutdown order at all. But don’t forget to consider whether you had reduced operations. For example, was the capacity of your business limited? Did you have to change your hours of operation due to curfews?
Both of these would qualify as partial shutdowns. If your business was deemed essential but critical suppliers were not, was your supply chain cut as a result? If this kept you from operating your business, you were still impacted by an order. Remember to document everything very carefully for companies that offer both benefits.

First, remember you don’t need to show a drop in receipts if your business was under a government shutdown order or if it is a recovery startup business. Remember, you’re comparing each quarter to the same period in 2019, when the economy was booming and business was good. You may show more losses than you think against those strong 2019 quarters. For 2021, you only have to demonstrate a 20% or greater decline in gross receipts.

Many business owners have heard about the IRS backlog and wonder if the money for ERTC will run out before they can receive their refund. The answer is no!

The ERTC is a refundable tax credit, not a loan or grant program like the PPP with funds set aside by Congress. Therefore, ERTC cannot run out of money. And although the turnaround time between filing amended 941-X and receiving a refund has been running 4-6 months, the IRS is getting faster all the time

TPG ERTC FILING SERVICE

NEED A LITTLE HELP DETERMINING IF YOUR BUSINESS QUALIFIES FOR ERTC AND CALCULATING YOUR CREDIT?

TPG can help you analyze your situation and file amended returns.

Current and new TPG clients can add on the ERTC filing service to their payroll service. If your company is eligible for ERTC, TPG can assist with calculating the credits and filing amended payroll tax returns that allow you to claim your credits with the IRS. With this service, TPG will take care of all of the following.

number-1
Review Qualified Wages

With your payroll data, TPG will review all earned wages per quarter to begin accurate calculations.

number-2
Calculate Credit Amount

Taking into consideration the eligible tax period of your PPP forgiveness.

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File Amended Returns

TPG will process qualified payroll amounts through our payroll system for accuracy. Then will file the necessary amended tax returns by quarter.

Are you eligible for an Employee Retention Tax Credit? Talk to us today.