Numerous changes in company operations were brought about by the coronavirus epidemic, which also prompted legislation that altered the tax code and the business credit system. The “Consolidated Appropriations Act, 2021” (“CAA”) is one of those laws and it provided a way of relief for many businesses, healthcare providers, and other entities affected by the epidemic. The Employee Retention Credit (ERC), which is a chance offered to qualified firms, is one such opportunity. The ERC still has a lot of complexities that can be challenging for employers to understand despite being originally developed as part of the CARES Act and enhanced as part of the CAA. We address some of the most often asked queries about this important credit in our blog.
Who Are the Eligible Employers?
An organisation must be carrying on a trade or operating as a business in the financial years 2020 or 2021, have experienced a full or partial suspension due to the pandemic, supply chain disruptions due to vendors who experienced shutdown orders, or have experienced a significant loss of gross receipts in order to qualify.
What Affects Gross Receipts as a “Significant Decline”?
The IRS uses percentages that are based on an organization’s 2019 Gross Receipts to determine what constitutes a “significant fall” in 2020 as opposed to 2021. The drop must be larger than 50% in 2020 and greater than 20% in 2021. This is evaluated on a quarterly basis in both cases and corresponds to the same quarter in 2019. For the year 2021, there is an exception to this rule: if a preceding quarter was required to be larger than 20%, it might be used in place of a prior year.
Which Workers Are Eligible?
For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer.
- For the 2021 ERCs, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer.
- The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Code.
What Quarters Can the ERC Be Reclaimed For?
The eligibility determines how many quarters may be claimed. Wages paid between 3/13/20 and 9/30/21 are eligible for the ERC credit. Wages paid between 7/1/21 and 12/31/21 are eligible for starting firms.
Can I Make an ERC Claim If I Got a PPP Loan?
Yes. You can now claim the ERC credit even if you had a PPP loan thanks to the revisions made by the CAA Act and enacted into law. Simply put, we cannot spend identical funds, dollar for dollar. This factor is taken into consideration while determining your ERC qualification.
How much might be claimed annually? What Wages Are Eligible?
The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.
Example 1: Employer M pays $10,000 in qualified wages to Employee A in the second quarter of 2020. The Employee Retention Credit available to Employer M for the qualified wages paid to Employee A is $5,000.
Example 2: Employer N pays $8,000 in qualified wages to Employee B in the second quarter 2020 and $8,000 in qualified wages in the third quarter 2020. The credit available to Employer N for the qualified wages paid to Employee B is equal to $4,000 in the second quarter and $1,000 in the third quarter due to the overall limit of 50 percent of $10,000 of qualified wages per employee for all calendar quarters.
How is the ERC Said to Work?
The employee wage requirements are used to calculate the ERC credit, which is subsequently claimed by revising the related payroll tax reports.
How soon must I submit an ERC claim?
After submitting Form 941, amended payroll tax returns may be filed three years later. Accordingly, you have till Q1 of 2023 for Q1 of 2020, Q1 of 2021 until Q1 of 2024, and so on.
Are ERC credits tax deductible?
ERC credits are not considered to be taxable income. It does, however, change your payroll costs. The precise amount of your refund must be communicated to your CPA so they can accurately report the changes on your business tax returns after you get it.
What Will Happen Next?
Despite the fact that the procedure can be complicated, the following easy stages will assist you in navigating the ERC:
- a) To find out if you qualify, complete our Qualification form.
- b) Obtain your 941 forms and payroll data so that we can start computing your credit.
- c) Work with our staff to submit all the necessary documentation and information.
You’ll then have a better idea of the types of funding your company is eligible for. We at Occams are dedicated about guiding small businesses through these challenging situations and trying procedures. For specific assistance with the Employee Retention Credit, get in touch with our staff; we’re happy to help! You can even book a 15-min free consultation here.