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ERTC TAX CREDIT

What Is ERTC?

ERTC is a refundable credit that encourages employers to keep their employees on the payroll during the COVID-19 pandemic. It was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and provides financial relief to employers by rewarding them with $26,000 per employee. 

Businesses can claim the ERTC by paying qualified wages to their employees, including specific health insurance costs paid to employees. Here are the changes in the ERTC over the years (from 2020 to 2021).

ERTC Tax Credit

CARES Act

In 2020, the CARES Act created the ERTC tax credit program. This program enabled eligible businesses and employers to claim a credit against 50% of qualified wages paid. The maximum credit amount per employee in 2020 was up to $10,000 paid annually from March 13 to December 30, 2021. 

American Rescue Plan (ARP)

In 2021, the American Rescue Plan extended the ERTC tax credit to the end of 2021. The credit limit was still the same, 70% of qualified wages with a limit of up to $10,000 per quarter. This means that an employer could claim $7,000 per quarter per employee.

Consolidated Appropriations Act

Initially, businesses could either take a loan from Paycheck Protection Program (PPP) or claim credit from ERTC. However, in 2021, the Consolidated Appropriations Act changed this rule. Now, medium to small-sized businesses could benefit from ERTC, even if they had taken a PPP loan. The program was also extended to early 2021, and the qualified wages for the credit per employee was $10,000 per quarter.

Infrastructure and Investment Jobs Act

On November 15, 2021, the Infrastructure and Investment Jobs Act was signed, and the ERTC program’s end date was changed from December 2021 to September 2021. This means the wages paid after September 30th will not be considered eligible for ERTC tax credit. However, this doesn’t mean the companies can’t still claim the credit. For instance, Recovery Startup Businesses are qualified to claim ERTC till the end of 2021 if they had an average of $1 million or less in gross receipts.

How Is The Credit Calculated?

You can calculate the ERTC tax credit in 4 simple steps.

Step 1

First, you need to determine what quarters of the calendar year 2020 and 2021 your business qualifies for an ERTC fund. Was your business partially or fully suspended, or did you face a 50 to 20% gross receipt decline?

If your business was established in 2020, you could compare the quarters of 2020 with 2021 when applying for the tax credit.

Step 2

Next, you need to determine the total qualified wages paid to employees per quarter. Also, include the qualified health insurance expenses but don’t include wages that have been used against the PPP loan.

Step 3

Once you calculate all the qualified wages paid to employees in 2020, apply a $10,000 cap per employee in all quarters combined. Then, multiply the qualified wages with the annual cap by 50% to determine your tax credit amount for 2020. 

The maximum credit amount for each employee is $5,000.

Step 4

For 2021, calculate the qualified wages paid to each employee in Q1, Q2, and Q3 (since the program was reduced to September 30, 2021). Apply a cap of $10,000 per employee across all quarters, and multiply the qualified wages up to the quarterly cap by 70% to determine your tax credit amount for 2021.

The maximum credit amount for each employee is $7,000.

FAQ's

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.

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:

Businesses who applied for and received PPP funds could now also claim ERTC credits.
ERTC credits could be retroactively claimed for businesses that qualified in 2020.
ERTC credits were extended through 9/30/21 with lower qualification requirements.
The per-employee cap on qualifying wages increased from $10,000 for all of 2020 to $10,000 per quarter for the first 3 quarters of 2021.
The refundable credit amount increased from 50% of qualifying wages in 2020 to 70% in 2021.
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 1040 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, CPA, or Financial Advisor 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.

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.

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 Bookkeeper should certainly have access to all the information that is needed for an accurate calculation of your legal ERTC claim. They will have your financial reports, payroll registers, and PPP loan forgiveness documents.

The Million Dollar Question is . . . Do They Have The Time?

  • Do they have the time to dig into the text of American Rescue Plan Act of 2021
  • And its accompanying referenced laws like: CARES ActFamilies First ActPayroll & Healthcare Enhancement ActPPP Payroll Flexibility Act and the Consolidated Appropriations Act
  • Time to read the IRS Interpretations and FAQ’s? And cross-reference those definitions with that of PPP which was separately defined and dissimilarly interpreted in the Small Business Administration’s Bulletins and IFRs?
  • Do they have the time to ensure accuracy in eligibility determination, maximize your computation and create the supporting documentation you’ll need to support an IRS audit of employer taxes?

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.