The Employee Retention Credit (ERC) is a pivotal element of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), specifically designed to help businesses retain their employees amidst economic downturns.
As a fully refundable payroll tax credit, it offers financial relief by directly reducing the payroll taxes eligible employers must send to the Internal Revenue Service (IRS).
Introducing this credit was not just about preventing layoffs during challenging times like the COVID-19 pandemic but also incentivizing employers to keep their workforce intact despite business slowdowns or suspensions of operations. Thus, ERC provides immediate cash flow assistance for businesses facing an economic crisis while reinforcing employee retention initiatives.
Qualifying Amounts and Wages That Affect Employee Retention Credit Calculations
Deciphering qualifying amounts and wages for the Employee Retention Tax Credit (ERTC) is a critical step in the application process. Essentially, qualified wages include all employee remunerations, along with certain health plan expenses.
For businesses with 100 or fewer full-time employees in 2019, all wages paid between March 13, 2020, and December 31, 2021, qualify. Larger businesses have more specific guidelines; only those wages paid to employees not providing services due to COVID-19-related circumstances are eligible.
The credit value varies per period: up to $5,000 per employee for wages paid in 2020 and up to $7,000 quarterly in 2021. Such detailed criteria make it imperative that employers seeking this beneficial financial relief option under the CARES Act undertake meticulous payroll costs calculations before submission via Form 941.
Steps to Apply for the Employee Retention Tax Credit
To apply for the Employee Retention Credit, businesses must evaluate their eligibility, calculate qualified wages, and file the eligible claim application via Form 941-X with the IRS.
Evaluating ERC Tax Credit Eligibility
Determining eligibility for the Employee Retention Credit (ERC) is a crucial step in the application process and involves several key considerations. First, businesses must identify whether they have experienced significant business decline or had operations partially suspended due to governmental orders related to the COVID-19 pandemic.
Furthermore, if your company received a Paycheck Protection Program (PPP) loan, this does not disqualify you from applying for the ERTC Tax Credit, an important fact many small businesses overlook.
It's also worth noting that specific payroll costs count towards qualified wages. Understanding these parameters can help ensure accurate calculations when filing Form 941-X with the IRS. Proper eligibility evaluation potentially leads to immediate financial relief through reduced payroll taxes. Thus, careful consideration here sets the stage for a successful ERC application.
Calculating ERTC Credit Qualified Wages
Businesses need to consider two different scenarios to calculate the qualified wages for the Employee Retention Credit (ERC). The first scenario applies to businesses with more than 100 full-time employees, and the second scenario is to those with 100 or fewer full-time employees.
For businesses with over 100 employees, only wages paid to employees not providing services due to a partial suspension of operations or a significant decline in gross receipts can be considered qualified wages.
On the other hand, for smaller businesses with 100 or fewer employees, all wages paid during eligible periods can be treated as qualified wages, regardless of whether the employee is working or not.
Filing Application via Form 941-X
To apply for the Employee Retention Credit (ERC), businesses must file Form 941-X with the IRS. The original Form 941 is required for reporting payroll taxes, and amending Form 941-X includes a section to claim the ERC.
It is essential to accurately complete this form to ensure eligibility and receive the credit promptly. By filing Form 941-X, businesses can directly reduce their payroll taxes sent to the IRS, providing immediate financial relief.
This simplifies the process of claiming the ERC and allows businesses to take advantage of this valuable tax credit that can help offset qualified wages paid during periods of a significant decline in gross receipts or partial suspension of operations.
Challenges of Applying for the Employee Retention Credit
Applying for the Employee Retention Credit can present challenges, including potential effects on qualifications for other federal loans and proving a significant decline in business.
Potential Effects on Qualifications for Other Federal Loans
Applying for the Employee Retention Credit (ERC) can have potential effects on a business's qualifications for other federal loans, such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL).
While businesses that received PPP loans are still eligible for the ERC, it's important to note that any wages used to qualify for loan forgiveness under the PPP cannot be double-counted towards qualified wages for the ERC.
This means that using certain wages to claim both benefits is not allowed. Additionally, businesses must consider how claiming the ERC may impact their eligibility or calculations for other COVID-19 relief programs.
Proving a Significant Decline in Business
To qualify for the Employee Retention Tax Credit (ERTC), businesses must demonstrate a significant decline in their gross receipts compared to the same quarter in 2019. This means providing evidence of a substantial decrease in revenue, which could be attributed to factors such as reduced customer demand, supply chain disruptions, or government-imposed restrictions due to the COVID-19 pandemic.
The threshold for proving a significant decline varies depending on the business size and whether it existed before 2019. Businesses can substantiate their eligibility for this valuable tax credit by carefully documenting financial statements and tracking sales figures.
Tax Implications of Receiving an ERC Refund
The Employee Retention Credit (ERC) has important tax implications for businesses applying for the credit. First and foremost, it's crucial to understand that the ERC Tax Credit is not treated as taxable income.
This means businesses do not have to report the credit on their federal income tax returns or pay taxes. Additionally, employers can deduct qualified wages used to calculate the ERC from their payroll tax liabilities.
The business will have to go back and amend their past annual tax returns, for either 2020 and / or 2021, depending on what quarters they received ERC refund checks for. By receiving a tax refund, the payroll expenses are reduced for that tax year, equal to the amount of ERC refund received.
This reduces the payroll taxes they owe to the IRS, resulting in potential financial relief for businesses. Businesses must consult with a tax professional or accountant to fully grasp how the ERC may impact their specific tax situation and ensure compliance with all relevant regulations and reporting requirements.
Other IRS Tips and Guidance When Filing for the Employee Retention Tax Credit
The IRS wants business owners to stay protected. They have issued warnings about ERC credit scams so businesses stay aware. Furthermore, the IRS states you should avoid paying an ERC contingency fee or percentage which is based on your employee retention tax credit refund amount.
For ERTC 2023 updates and beyond, eligible employers and businesses have an ERTC deadline of April 15th, 2024, for retroactively filing ERC credit claims for eligible quarters from the 2020 tax year. April 15th, 2025, is the deadline to claim the tax credit for eligible quarters from the 2021 tax year.
About Disaster Loan Advisors™ Employee Retention Credit (ERC) Services
Disaster Loan Advisors™ (DLA) is a trusted team of financial tax professionals and Employee Retention Credit (ERC) consulting specialists dedicated to saving businesses from lost sales, lost customers and clients, lost revenue due to financial and economic harm caused by the COVID-19 / Coronavirus disaster, Delta and Omicron variants, and other recession and inflation downturns in the economy.
Having worked with over 1500+ business clients navigate the SBA Economic Injury Disaster Loan (EIDL), Paycheck Protection Program (PPP), and Restaurant Revitalization Fund (RRF) programs, DLA further refined its expertise in the ERC Tax Credit IRS program having assisted more than 700+ companies with their ERC Claims. Assisting ownership groups with multiple business entities, multiple location business owners, and other complex situations that require an expert tax and accounting strategist to be brought in to assess the situation and create the most strategic path forward.
DLA further specializes in another key pandemic-era SBA / IRS program where business owners are leaving a lot of relief fund money on the table. It is the often misunderstood and confusing Employee Retention Tax Credit (ERC) / Employee Retention Tax Credit (ERTC) program whereby company owners and partners can retroactively receive up to $26,000 to $33,000 back for each W-2 employee they had on payroll for the 2020 and 2021 tax filing years. Done correctly, these tax credits or cash refunds can be claimed retroactively for up to 3 years.
It's encouraged that business owners obtain professional assistance in going through the complex 941-X amended filing process to help your company maximize the full value of the ERC Credit Program, while staying safe and compliant within the complex IRS rules and regulations for claiming the ERC Credits.
DLA doesn't charge a percentage (%) of your ERC refund like many companies are charging. Instead, DLA works on a reasonable professional flat-fee basis. If you are looking for an ERC company that believes in providing professional ERC services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors is a good fit for you.
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Elena Goldstein
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elena.goldstein@disasterloanadvisors.com
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SOURCE: Disaster Loan Advisors™ (DLA)
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