It’s been one of the most challenging times to be a business owner, recently.
To help business owners and incentivize companies to keep employees on the payroll, the IRS introduced the Employee Retention Credit (ERC).
But, do you know everything it entails? Do you know if you’re eligible? How do you calculate it?
This ultimate employee retention tax credit guide serves as a summary of all the different elements you need to know, for each of which, we have dedicated content for you to work through.
Is the employee retention credit real?
Yes, the employee retention credit is real. However, scams do exist around the ERC, which puts the entire integrity of the program into question. Even so, the IRS details a definitive structure & guidance as to how the retention credit works & who is eligible.
So, what is the employee retention credit (ERC)?
The Employee Retention Credit is a refundable tax credit to help businesses impacted by COVID-19 to retain their employees. The credit is equal to 70% of qualified wages paid to employees from March 13, 2020, through December 31, 2021, up to a maximum of $7,000 per employee per quarter.
ERC tax credit: an overview
The ERC tax credit sounds very simple on paper, but you need to be aware of all the following elements to ensure you’re maximizing the benefits that the CARES Act employee retention credit brings.
The different elements that we cover in each chapter in this guide are:
- Calculating the ERC
- How to apply
- Claiming the ERC and PPP together
- Nonprofit organizations
- Taxable income & ERC
- ERC audits
Use the sections below as a general summary for each of these elements and then check out each of full articles on each of them:
Chapter 1: Eligibility for the employee retention credit program
“Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience[d] either:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or,
- a significant decline in gross receipts.”
A full or partial suspension of business engagement should be easy enough to understand. Many companies did suspend operations and unfortunately some continue to remain shuttered in this financial limbo.
For companies that operated at a loss, gross receipts will need to be tallied up to meet employee retention credit eligibility requirements.
Chapter 2: Calculating ERTC credits
The ERTC calculation can be both straightforward and complicated, and accuracy is crucial to avoid problems, especially since the rules governing the ERC have evolved, and the calculations for 2020 and 2021 differ.
To calculate the ERC for 2021, a business must qualify by:
- Meeting financial setback criteria
- Have fewer than 500 employees
- Identify qualifying wages, and
- File the return on time
In terms of capping ERTC credits, the eligible wages are capped at $10,000 per employee per quarter, and the credit is calculated at 70% of the eligible wages.
The ERC for 2020 follows similar principles, but the calculation rate is 50% instead of 70%. In addition, companies with more than 100 employees in 2020 do not qualify for the ERC.
Chapter 3: Applying for the employee retention tax credit
On the ERC application, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns.
This will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of social security tax, but the excess is refundable under normal procedures.
The refund-ability factor of this bill gives a big boost to companies who have been hit hard by COVID-19.
Chapter 4: Claiming ERC & PPP together
The Consolidated Appropriations Act implemented changes to the original terms of PPP loans.
The IRS issued a news release that will now allow “deductions for the payments of eligible expenses when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (“PPP”).”
Guidance of the CARES Act was amended to say, “that no deduction is denied, no tax attribute is reduced, and no basis increase is denied by reason of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan.”
The previous guidance that disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan are now obsolete.
And so, businesses are able to claim the employee retention credit and ppp at the same time, but there are pitfalls in doing so that you should avoid.
Chapter 5: Nonprofits & employee retention tax credits
Employee retention tax credits apply to nonprofit organizations, including churches, just as it does to regular small businesses.
However, determining eligibility and navigating the rules can be challenging.
Nonprofits must meet the eligibility requirements, including the government mandate test and the gross receipts test.
The employee retention credit for nonprofits is claimed by filing Form 941-X and declaring the amount on Form 990, and the credit amount depends on the qualified wages and the number of employees.
Chapter 6: Taxable income & ERC credits
To answer the question of, “Is ERC taxable income?”, ERC credits aren’t specifically classed as taxable income, but they do alter your payroll deductions, which in turn impacts taxable profits.
With this in mind, you need to understand the relationship between the ERC and taxable income to properly report it on relevant tax forms, such as 1120-S and 1065.
The amount the ERC affects tax returns depends on the amount claimed under the credit, payroll expense deductions taken during the year, and the type of business entity.
Chapter 7: Navigating audits
With any tax credit or deduction, it's important to ensure that you're claiming the ERTC correctly and in compliance with the rules and regulations set out by the Internal Revenue Service (IRS).
While the IRS has confirmed an ERC audit can occur, there are steps you can take to avoid these in the first instance but to also be prepared in case your business is audited.
We cover the following in this chapter:
- Preventing the audit
- Statute of limitations for the ERC audit
- What to do if you’re notified of an audit
Chapter 8: Scams relating to employee retention credits
Employee retention credits scams are becoming increasingly common, with scammers using various tactics to defraud businesses and exploit the employee tax retention credit program.
The IRS has issued warnings about these scams, emphasizing the importance of tax compliance and caution when dealing with third-party entities.
Although the ERC itself is a legitimate refundable tax credit, it's crucial to be aware of these current common scams:
- Phone calls: Scammers contact employers over the phone and make false claims about ERC eligibility. They may disregard the requirements set by the government and charge excessive fees for unnecessary services, even if the employer qualifies for the credit.
- Collections: Fraudsters file ERC claims on behalf of businesses and keep a significant portion of the credit for themselves.
- Identity theft: They target businesses that aren’t eligible for the ERC, obtain sensitive information, and use stolen identities to fraudulently apply for the credit.
To avoid ERC scams, businesses should work with trusted tax professionals, confirm eligibility, communicate personally with advisors, understand ERC requirements, and be cautious of unsolicited advice or unrealistic promises.
These precautions help protect against fraud, ensure compliance, and safeguard businesses from falling victim to scams.
How Brotman can help with your ERC credit claim
If your business was forced to suspend its operations or saw a steep decline in gross receipts, the ERC credit could shore up your finances until the pandemic is over.
If you have more questions about how these policies may impact your business specifically, call the Brotman Law offices – we are here to help.
Final points on the ERTC credit
There’s no doubt that the ERTC credit can provide significant financial relief to businesses that have been affected by the COVID-19 pandemic, both for traditional business and nonprofits.
However, the rules for eligibility and qualified wages are complex and can vary depending on the size of the employer.
Unfortunately, you also need to be very aware of current scams kicking around that, sadly, prey on the weak.
Therefore, I highly recommend you consult with a tax professional (such as the team here at Brotman Law) to determine eligibility, maximize your credit and ensure you aren’t falling victim to scammers.
FAQs on the CARES Act employee retention credit
Can businesses claim the ERTC for wages paid to owners or their family members?
No, businesses cannot claim the ERTC for wages paid to owners or their family members. However, they can claim the credit for wages paid to other employees.
Can businesses claim both the ERTC and the FFCRA tax credits?
No, businesses cannot claim both the ERTC and the FFCRA tax credits for the same wages. However, they can claim both credits for different wages paid to the same employee.
How long will the ERTC be available?
The ERTC is currently available for wages paid from March 13, 2020, through December 31, 2021. However, the rules and regulations around the credit may change, so businesses should consult with their tax professionals for the most up-to-date information.