While other states didn’t mandate businesses in similar industries to shut down during the Covid pandemic, Penn State was heavily hampered in certain sectors.
As a result, Pennsylvania businesses can now claim the Employee Retention Credit to at least claw back some of the financial hardship they went through.
This Pennsylvania Employee Retention Credit guide will walk you through understanding if you’re still eligible, how much you can claim, how to navigate audits from the IRS and scams to be on the lookout for.
If you’d prefer to just get in touch with one of our ERC attorneys, hit the button below to check out how we can help you. Otherwise, immerse yourself in this guide.
What is the ERTC tax credit in PA?
The ERTC tax credit in PA is a refundable tax credit designed to assist employers in Pennsylvania. It offers a significant boost by providing a credit equal to 70% of qualified wages paid to employees from March 13, 2020, through December 31, 2021, with a maximum cap of $7,000 per employee per quarter.
You can claim the ERC in Pennsylvania if your business was operating throughout the 2020 calendar year and encountered one of the following ERC qualifications:
Understanding a full or partial suspension of business activities is relatively straightforward, as many companies in Pennsylvania faced temporary closures, and some continue to grapple with financial uncertainty.
- A full or partial suspension of your business operations during any calendar quarter due to governmental orders that restricted commerce, travel, or gatherings, all in response to the COVID-19 pandemic.
- Suffered a significant decline in gross receipts.
Additionally, for businesses that operated at a loss, calculating gross receipts becomes pivotal in meeting the eligibility requirements for the employee retention credit in the state.
Calculating the Pennsylvania ERC grant
Calculating the Pennsylvania ERC grant can present both straightforward aspects and complexities, making precision of utmost importance.
This is particularly critical as the rules governing the ERC have evolved over time, with distinctions in calculations between 2020 and 2021.
To compute the ERC for 2021, businesses must adhere to specific criteria related to the ERC calculation:
- Meeting the financial setback criteria, taking into account the unique economic challenges faced within the state.
- Maintaining a workforce of fewer than 500 employees.
- Accurately identifying qualifying wages.
- Ensuring timely filing of the return by the end of the same quarter in 2024.
When it comes to capping ERTC credits in Pennsylvania, eligible wages are capped at $10,000 per employee per quarter, and the credit is computed at 70% of these eligible wages.
For the ERC in Pennsylvania during 2020, similar principles apply, but the calculation rate is reduced to 50% instead of 70%. Additionally, it's worth noting that companies with more than 100 employees during 2020 are not eligible for the ERC within the state.
Applying for the Pennsylvania Employee Retention Credit
When making your ERC application, you need to report total qualified wages and the associated health insurance costs for each quarter on their quarterly employment tax returns.
This means using Form 941, starting from the second quarter onwards. The credit is offset against the employer's portion of the state's social security tax, and any excess is subject to normal refund procedures.
Claiming PPP & ERC together
In Pennsylvania, the Consolidated Appropriations (CARES) Act introduced notable changes to the original terms of PPP loans.
The IRS, in response, allows 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').
Furthermore, the guidance provided by the CARES Act was amended to explicitly state 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."
This signifies a departure from previous guidance that disallowed deductions for eligible expenses when such payments could lead to the forgiveness of a covered loan, rendering such guidelines obsolete.
As a result, businesses operating in Pennsylvania now have the opportunity to claim both the employee retention credit in Pennsylvania and PPP benefits simultaneously. However, it's essential to exercise caution and be aware of potential pitfalls when combining these programs.
Be sure to check out our ERC PPP guide for more information on this!
Guidance for nonprofits in the Keystone State
In Pennsylvania, the employee retention tax credits extend to nonprofit organizations, including churches, in the same way it does for regular small businesses. However, understanding eligibility and adhering to the regulations can pose challenges.
Nonprofits operating in the state must satisfy eligibility criteria, which encompass the government mandate test and the gross receipts test.
To claim the ERC for nonprofits in Pennsylvania, organizations should complete the process by filing Form 941-X and reporting the corresponding amount on Form 990.
The credit's value hinges on factors such as the qualified wages and the number of employees involved in the nonprofit's operations within the state.
Is employee retention credit taxable in Pennsylvania?
No, the employee retention credit isn't taxable in Pennsylvania. The ERC is designed as a tax incentive to support businesses and nonprofit organizations in the state during challenging economic times.
While it can affect payroll deductions and taxable profits, the question of "is ERC taxable income" the ERC itself is not considered taxable income. This distinction is crucial for accurate reporting on relevant state tax forms, such as 1120-S and 1065, depending on your business structure and operations in Pennsylvania.
Audits & Pennsylvania ERC conformity
In Pennsylvania, like anywhere else, it's crucial to handle the Employee Retention Tax Credit accurately and in accordance with the Internal Revenue Service (IRS) guidelines.
While the IRS has acknowledged the possibility of an ERC audit, there are proactive measures you can take to minimize this risk and be prepared if your business faces an audit.
In our detailed ERC audit guide, we cover tips on the following:
- Preventing an audit.
- Understanding the statute of limitations pertaining to ERC audits.
- Steps to take if your business receives notice of an audit.
Scams to be aware of
The proliferation of employee retention credit scams is a growing concern. Scammers employ various tactics to exploit the employee tax retention credit program, making vigilance imperative for local businesses.
The IRS has issued warnings about these scams, emphasizing the importance of tax compliance and caution when dealing with third-party entities.
While the ERC itself is a legitimate refundable tax credit, scams surrounding it include:
- Phone calls: Scammers contact Pennsylvania employers via phone, making false ERC eligibility claims, and charging excessive fees for unnecessary services.
- Collections: Fraudsters file ERC claims on behalf of businesses, keeping a substantial portion of the credit.
- Identity theft: They target ineligible businesses in Pennsylvania, acquire sensitive data, and fraudulently apply for the ERC using stolen identities.
To guard against ERC scams, businesses should:
- ONLY collaborate with trusted tax professionals
- Validate their eligibility for the credit
- Engage in direct communication with advisors
- Gain a basic understanding of the ERC requirements
- Exercise caution regarding unsolicited advice or unrealistic promises.
These proactive measures help protect against fraud, ensure compliance, and shield Pennsylvania businesses from falling prey to scams.
How Brotman Law can help you
Traversing the complex terrain of employee retention credits, particularly in Pennsylvania's ever-changing tax landscape, can be a formidable task.
Leveraging our wealth of experience, we can help you understand ERC eligibility, optimize your claims, and establish safeguards against potential scams. We’re committed to assisting you in maximizing the benefits of the Employee Retention Credit program while adhering to regulations.
Contact us today to access the dedicated support of our accomplished ERC tax attorney team, ensuring your business is well-prepared to take advantage of the credit the RIGHT way.
Understanding the eligibility criteria and identifying qualified wages can be intricate and is often contingent on the scale of the employer's operations within the state.
Unfortunately, ongoing scams targeting vulnerable entities are a cause for concern.
To effectively address these challenges in Pennsylvania, we encourage you to connect with us. Our personalized assistance can assist in evaluating your eligibility, optimizing your credit, and safeguarding you from potential fraudulent activities.
We are committed to helping you make sense of the ERC landscape, ensuring you seize every opportunity this tax credit presents, and ultimately, steering your business towards a path of recovery and growth.
The US states we support through the ERC