Now that PPP2 has come and gone for the most part we are seeing more questions for help on the Employee Retention Credit (ERC) to see if they are eligible and how to apply. We will cover both in this article but first lets give a little background.
What is the Employee Retention Credit (ERC)? It is a refundable tax credit against the employee share of Social Security taxes that are equal to 70% of the qualified wages after 12/31/2020 through 6/30/2021. It is limited to $10k per employee per calendar quarter in 2021 and its maximum ERC amount is $7k per employee per quarter or $14k for the year.
Eligibility –You need at least a 50% drop in quarterly revenue
- Business experienced a full or partial suspension of operations due to COVID causing a decline in gross receipts.
- If 2021 gross receipts are less than 80% of gross receipts for the same quarter of 2019.
- If 2020 gross receipts are less than 50% of gross receipts for the same quarter of 2019.
- Employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts.
- “Gross Receipts” means gross receipts of the taxable year and generally includes total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources, regardless of whether those amounts are derived in the ordinary course of the taxpayer’s trade or business.
- If an employer is subject to a governmental order to fully or partially suspend its business operations and the order is subsequently lifted in the middle of a calendar quarter, the employer is considered eligible, but only for the wages paid during the period of full or partial suspension.
- An employer that voluntarily suspends operation of a trade or business or voluntarily reduces hours due to COVID is not eligible.
- If an employer’s workplace is closed by a governmental order, but the employee is able to continue operation comparable to its operations prior to the closure by allowing its employees to telework is not eligible.
- Self-employed individuals are not eligible for the employee retention credit with respect to their own Self-employment earnings. However, a self-employed individual who employs other individuals, may be eligible.
- Household employers are not eligible. This means owners and family members of owners are not elligible. One exception is if they own less than 50% of the company.
How to Apply –
In most cases the best place to start is with your payroll provider, ie gusto, qbo payroll, adp, trinet, etc. They can adjust the tax withholding and help refile past quarterly returns, which are the two main steps. One difficulty is for quarters when your company received PPP money as those will need to be backed out of the calculation and some payroll providers have not wanted to mess with this. Here are the steps on a more detailed level –
(1) reduce their deposits of federal employment taxes, including withheld taxes, that would otherwise be required up to the amount of the anticipated credit, and
(2) request an advance of the amount of the anticipated credit that exceeds the reduced federal employment tax deposits by filing Form 7200.
Eligible employers that filed quarterly federal employment tax returns for 2020 had the ability to submit a Form 7200 to request an advance for each calendar quarter before the earlier of
(1) the date the employer filed the Form 941 for the relevant quarter or
(2) the due date for filing the quarterly employment tax return, as provided below:
• For the second quarter of 2020: July 31, 2020;
• For the third quarter of 2020: November 2, 2020;
• For the fourth quarter of 2020: February 1, 2021
Forms 7200 submitted after the due dates for credits claimed in the relevant quarters in 2020 will not be processed.
- Qualified wages, including certain health plan expenses, are generally limited to wages and compensation, both determined without regard to the social security wage base, paid by an eligible employer to some or all of its employees after March 12, 2020, and before January 1, 2021.
- Qualified health plan expenses include both the portion of the cost paid by the eligible employer and the portion of the cost paid by the employee. However, amounts that the employee paid for with after-tax contributions are not considered qualified health plan expenses.
- Qualified wages do not include qualified sick leave wages and qualified family leave wages.
- Payments, including severance payments or other post-termination payments, made to a former employee following termination of employment are not considered qualified wages for purposes of the employee retention credit.
- An employer that received a PPP loan may claim the employee retention credit for any qualified wages paid to employees if the employer is an eligible employer that meets the requirements for the credit. However, qualified wages for which the employer claims the employee retention credit are excluded from payroll costs paid during the covered period (payroll costs) that qualify for forgiveness under the PPP.
- Each eligible employer will report its employee retention credit on its federal employment tax return (or on its third-party payer’s federal employment tax return) without regard to its aggregation with other entities as a single employer for purposes of the credit.
- An eligible employer may file a claim for refund or make an interest-free adjustment by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for a past calendar quarter to claim the employee retention credit.
- An eligible employer will be required to substantiate eligibility for the employee retention credit by maintaining records showing all of the qualifications. The records and documentation should be kept for at least 4 years after the date the tax becomes due or is paid, whichever comes later, and be available for IRS review.
The laws on this are constantly changing the way they did for PPP, so if you think you are eligible or have questions then contact us at firstname.lastname@example.org or reach out to your CPA.