Uncategorized Archives - Employee Retention Credit faq https://covidtaxcredit2020.com/category/uncategorized/ Get the information you need about the Employee Retention Credit or ERC. Find out if you qualify for this 2020 CARES Act program. Mon, 11 Jul 2022 06:25:46 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.3 207754684 Employee Retention Credit FAQs https://covidtaxcredit2020.com/employee-retention-credit-faqs/ Mon, 11 Jul 2022 06:25:46 +0000 https://covidtaxcredit2020.com/?p=18 Are ERC and ERTC the same thing? Yes. The full name of the program is the Employee Retention Tax Credit (ERTC) but it is more commonly shortened to the Employee Retention Credit (ERC). This name is also officially recognized. In addition, you may see it referred to by several other names such as: Employee Tax … Continue reading "Employee Retention Credit FAQs"

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]]> Are ERC and ERTC the same thing?

Yes. The full name of the program is the Employee Retention Tax Credit (ERTC) but it is more commonly shortened to the Employee Retention Credit (ERC). This name is also officially recognized.

In addition, you may see it referred to by several other names such as: Employee Tax Credit, Employer Tax Credit, Covid Tax Credit, etc. While they may not be officially sanctioned names, they all refer to the same program.

What is the Employee Retention Tax Credit (ERTC)?

The Employee Retention Tax Credit was created as part of the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) along with the better-known Paycheck Protection Program (PPP loans). This act was passed by Congress in an attempt to encourage employers to not lay off their employees during the lockdowns in 2020.

The Employee Retention Tax Credit is a fully refundable tax credit which means it is not limited by the amount of actual taxes paid and can be used to generate a federal tax refund that is larger than the amount of taxes paid during that year. This tax credit can be used to offset all Federal employment tax withholdings including federal income tax, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS.

It initially applied only to wages paid between March 12, 2020 and December 31, 2020 and the allowed credit was equal to 50% of the qualified wages that eligible employers paid during that period. The eligible wages were capped at $10,000 per w-2 employee resulting in a maximum credit of $5,000 per employee for 2020.

Under the provisions of the original plan, businesses had to choose between getting a PPP loan or applying for the ERC. You could not do both and most businesses opted for PPP loans.

In 2021 Congress approved the Consolidated Appropriations Act which made several important changes to the original plan. First, it made the ERTC available to businesses who had received PPP loans – regardless of whether or not the loans had been forgiven. Second, the credit was increased from 50% to 70% of eligible wages. Third, although eligible wages were still capped at $10,000 it was changed to $10,000 per quarter for Q1 and Q2 of 2021. This increased the annual maximum credit for 2021 to $14,000 per employee.

On March 11, 2021, the American Rescue Plan Act went into effect which kept the credit at 70% of qualified wages and did not change the $10,000 wage cap per quarter. What it did was extended the program through Q3 and Q4 of 2021 making the possible credit for the year $28,000 per w-2 employee. However in November, Q4 was taken away and the end date for the ERTC program was changed to September 30, 2021 for most businesses by President Biden’s Infrastructure Investment and Jobs Act.

Now only Recovery Startup Businesses are still eligible to claim an Employee Retention Credit through the end of 2021. This exception is explained in more detail in another answer.

In the end, the final max credit for most businesses in 2021 is $21,000 per employee in addition to the $5,000 per employee in 2020.

The IRS description and guidelines for this plan can be found at: https://www.irs.gov/coronavirus/employee-retention-credit

Does the Employee Retention Credit have to be paid back?

No. The ERC is a fully refundable tax credit – not a loan. It does not have to be paid back. 

Is ERC over?

 The short answer is: Yes, the program is over. Even so, you can still take advantage of it.

All though the program has ended, businesses can still claim the Employee Retention Tax Credit after the fact. As with other amendments to tax returns filed with the IRS, businesses have 3 years to determine if any of the wages they paid in 2020 or 2021 are eligible and to file their IRS Form 941x which is the form used to adjust an employer’s quarterly Federal tax return or to request a refund.

This means businesses have until 2024 to amend their 2020 returns and until 2025 to amend 2021’s. The specific deadline during those years will be the normal tax return filing date (either April 15 if filing as part of a personal return or the 15th day of the third month following the end of their tax year if filing a corporate return).

What Employers qualify for the Covid Tax Credit?

The ERC is available to a very broad range of businesses. Both for-profit and not-for-profit entities may qualify. Here are some examples of the types of businesses and organizations that have qualified for this program:

  • Restaurants
  • Education/Private Schools/Colleges/Universities/Trade Schools
  • Retail Stores
  • Hotels and Motels
  • Spas
  • Churches and 501(c) Organizations
  • Non-Profit Businesses
  • Industrial businesses
  • Healthcare
  • Professional Services
  • Real Estate
  • Construction
  • Technology Companies

The main category that is not eligible is government entities at the local, state, or federal level. Government contractors, however, can be eligible.

The bottom line is that most employers are potentially eligible if they had W-2 employees during 2020 and/or 2021.

More specific eligibility requirements include being:

  • Subject to government lockdown orders that fully or partially suspended operations during any calendar quarter and that limited commerce, travel, or group meetings due to concerns over the coronavirus.

– OR –

  • Had a significant decline in gross revenue during the calendar quarter.

It is important to point out that a business only needs to meet one of the two conditions to qualify. You do not need to meet both requirements. If you were subject to government lockdown restrictions, you probably still qualify even if you found a way to increase your revenue during that time.

It should be noted that businesses that were able to easily convert their employees to teleworkers and continue operations unimpeded have generally been found to not qualify for this program. Likewise, businesses deemed ‘essential’ will typically not qualify unless they meet the decreased revenue requirement.

Can churches or other religious organizations apply for the ERTC credit?

Yes. Any business – regardless of religious affiliation or lack thereof – that was adversely affected by government mandated capacity restrictions on gatherings or that that had a significant decline in gross receipts can qualify for the Employee Retention Credit program.

What Constitutes being Partially Suspended or Shut Down?

First, the business shutdown cannot have been a voluntary change in business operations. Normal business operations must have been limited due to a federal, state, or local orders that “limited commerce, travel, or the ability to meet in groups either for commercial, religious, or social purposes”. Stay at Home Orders for non-essential businesses, limits on the number of hours a business could be open, and capacity restrictions all fit in this category.

An example of partially suspended operations would be a restaurant that was forced to close its dining room but continued serve customers through carry-out or with a home delivery service.

Here is a partial list of qualifiers for ERC:

  • Increased time during shifts spent cleaning and sanitizing
  • A significant amount of time during shifts spent donning/doffing PPE
  • Limitations on how many people were allowed in your place of business
  • Unable to attend networking events as normal
  • Sales force was unable to function normally
  • Decreased operating capacity
  • Covid related issues in working with vendors
  • Decreased range of goods/services offered to customers
  • Decreased hours of operation
  • Changed hours of operation to allow for increased facility cleaning
  • Project cancelation or delay due to disruptions related to Covid
  • Supply chain disruptions

What if I was not shut down but was affected by supply chain issues?

Even if your business was not forced to either fully or partially suspend operations due to government lockdowns, there is still the second method of qualifying: decreased gross revenues. This decrease can be due to pretty much any cause – including supply chain issues. For instance, car dealerships and many other industries that rely on foreign manufactured products or parts have had difficulties due to things such as port closures in China or decreased output from Mexican manufacturing centers which had indoor capacity limitations.

What Qualifies as a Significant Decline in Gross Revenues?

Under the original terms of the CARES Act, a qualifying employer is one who experienced a decrease in gross receipts of 50% or more during a calendar quarter in 2020 when compared to the same quarter in 2019. If gross receipts during the following quarter increased again to reach a level equal to more than 80% when compared to the same quarter in 2019, then the employer no longer qualifies.

For 2021, the qualifications were adjusted in the Consolidated Appropriations Act and the reduction in gross receipts was reduced. A businesses experiencing a drop of 20% or more in gross receipts compared to the same quarter in 2019 now qualify for the program. For new businesses that do not have a 2019 quarter to use for comparison, the IRS allows the use of gross receipts from their first quarter of business to be used as the reference benchmark.

An additional option was added later in 2021 by the American Rescue Plan Act. Businesses now can choose to determine eligibility by comparing the gross receipts of a business quarter with the quarter that immediately preceded it. The corresponding quarter from 2019 is still available as an option as well.

Do forgiven PPP loans count as Revenue?

Maybe, and no.

Maybe: The forgiven portion of PPP loans may or may not be excluded from your gross revenue for the purposes of calculating income tax obligations based upon various factors. The details for determining this based upon your particular situation are beyond the scope of this report.

No: For the purposes of determining ERC eligibility, forgiven PPP loans are not to be included. In 2021 the IRS released Revenue Procedure 2021-33 that gave guidance allowing employers to exclude the amount of PPP loans forgiven, Shuttered Venue Operators Grants, or Restaurant Revitalization Funds from the definition of gross receipts – but only specifically in the context of determining their eligibility for the ERC program.

Can I apply for an Employee Retention Tax Credit if I received PPP loans?

Yes. Initially, as the program was laid out in the CARES Act, businesses had to choose between the PPP and ERTC programs and were not allowed to take advantage of both. This was changed in 2021 and businesses which received PPP loans – both forgiven and unforgiven – are now able to apply for ERC credit as well.

Can I file for the ERC Tax Credit if I haven’t yet filed for PPP forgiveness?

Yes. You do not need to wait until your PPP loans have been forgiven. However, if you are in this situation, it is advantageous to allocate the maximum available non-wage allowable costs to the PPP to be forgiven.

What is considered Gross Revenue for the ERC Credit?

For taxable employers, gross revenue includes:

  • Income from the sale of products or services less returns and allowances
  • Investment income including interest, dividends, rent received, royalties, and annuities even if the income is not derived from ordinary activity associated with the business’s primary trade or service.
  • It may be reduced by the adjusted basis of property used in the business or of capital assets sold.

For non-taxable employers, gross revenue includes:

  • Basically, it includes any money received.
  • Includes proceeds from any investments or grants.
  • It is not reduced by the adjusted bases of property used in the business or of capital assets sold.

How do I calculate the ERTC Credit?

The 2020 Covid Tax Credit is equal to 50% of qualified employee wages with a cap of $10,000 per employee for the year. The maximum credit is $5,000 per employee.

The 2021 credit is equal to 70% of qualified employee wages. The cap remains $10,000 but now resets for Q1, Q2, and Q3 making the maximum credit $21,000 per employee.

What are qualifying wages for calculating the retention credit?

As a general rule, any wages subject to FICA taxes will qualify for the ERC as do qualified health expenses as long as they were paid between March 12, 2020 and September 30, 2021 (or December 31, 2021 for Recovery Startup Businesses).

Wages paid from PPP loans that have been forgiven or are expected to be forgiven do not qualify for ERTC.

Determining what health expenses qualify can be complicated as the IRS has several ways to arrive at this number. Which one is most appropriate depends upon several circumstances and is a discussion beyond the scope of this report. The overly simplified answer is that, as a rule, they include the employer and employee pretax portions. The after-tax portion is probably not a qualified healthcare expense. The IRS explanation of this topic can be found here.

Are tipped wages included in the definition of qualified wages?

IRS notice 2021-49 clarified this point stating that tips would be included in qualified wages if these wages were subject to FICA. As a rule, this would mean if an employee’s tips were over $20 in the calendar month, then all tips would be included as qualified wages for the purpose of the ERC credit. If an employee’s total tips were less than $20 in the calendar month, then their tips are not subject FICA wages and do not qualify for the retention credit.

What employees qualify for the Employer Tax Credit?

They must be full-time employees.

In this instance, a full-time employee is defined as someone who worked at least 30 hours per week or 130 hours during the month in question.

Warning for those with PPP loans: The way employee full-time equivalent (FTE) is calculated for the PPP forgiveness report is different from the way it is calculated for ERTC purposes. Do not simply reuse that number.

In addition, there are some other restrictions which have been modified over time. Here is a summary:

Under the 2020 CARES Act:

Employers with more than 100 employees can only include the wages of the employees who were unable to work due to lockdowns or to decreased business volume. Wages paid to employees who were still able to perform their duties do not qualify even if these employees did not contribute directly to revenue generation. In addition, any paid vacation, sick days, or other paid days off included in the employer/employee agreement cannot be included in the ERTC calculations.

For employers with fewer than 100 employees, the rules are more lenient. Wages paid to all employees – both those working as normal and those who were unable to work – can be included in these calculations. The only exception is paid leave provided as part of the Families First Coronavirus Response Act.

Under the 2021 Consolidated Appropriations Act:

The upper limit on the number of employees for qualifying businesses was increased to 500.

Under the 2021 American Rescue Plan Act:

Some employers are now able to claim the credit against all employee’s qualified wages regardless of whether they have been prevented from carrying out their normal service. This allowance is for severely impacted businesses whose gross receipts for 2021’s Q3 are decreased by over 90% when compared to a comparable quarter from either 2019 or 2020.

How are large and small employers defined for the purposes of the ERTC Tax Credit?

When filing for the 2020 ERC, any employer with more than 100 average full-time employees – as measured in 2019 – is defined as a large employer.

For 2021, the cutoff was raised to 500 full-time employees – again based upon 2019 numbers.

Are Owner/Spouse Wages Included in Qualified Wages for the ERTC Credit?

Early uncertainty as to whether wages paid to a business owner or spouse could be included was addressed in IRS Notice 2021-49. In summary, it says that the wages paid to majority owners and their spouses are not qualifying wages but that wages paid to minority owners and their spouses may qualify.

Do wages paid to relatives of the business owner qualify for ERC?

According to IRS FAQ #59, wages paid to close relatives of a majority owner in the business do not qualify. Close relatives are defined as:

  • An owner’s child or a descendant of their children
  • An owner’s brother, sister, stepbrother, or stepsister
  • An owner’s father, mother, or any ancestor of either
  • An owner’s stepfather or stepmother
  • An owner’s niece or nephew
  • An owner’s uncle or aunt
  • An owner’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

What if I own multiple businesses?

All separate businesses which are held under common ownership that meet the IRS criteria for being considered a controlled group must all be evaluated together as a group for eligibility. After combining the data from all the separate entities, the qualifying tests are applied. If the combined numbers pass, then each of the entities qualify. In a case where the numbers do not pass, then none of the member businesses qualify. If the combined numbers pass, then the ERTC is calculated and filed for each entity separately.

Businesses not considered part of a controlled group are evaluated on an individual basis.

What is the interaction of ERTC with other credits and funding sources?

Wages that have been included in other credits cannot be included again for the purposes of ERC credits. For instance, if an employee is included for a Work Opportunity Tax Credit, you cannot include them again for the Employee Retention Credit. Likewise, wages paid by forgiven PPP loans, a Shuttered Venue Operators Grant (SVOG), or Restaurant Revitalization Fund (RFF) are not qualifying wages.

Since ERC credits can be significantly larger than the amount received in these other programs, it is worth exploring the ERTC program even for businesses who got PPP loans or funds from these other Covid relief programs.

Can my CPA or Payroll System file for my ERC credit?

As is common with economic development business tax incentive programs, the Employee Retention Credit has a number of complexities that may impact receiving an accurate, optimized, and audit-ready number. It is vital to fully document the processes and procedures, create and keep organized records, and avoid areas of risk in light of a potential IRS audit of the claim at some point in the future – potentially several years after the fact.

The ERC has numerous issues such as Controlled Group criteria, documenting qualification methodology, coordination with PPP loans, allocating healthcare expenses to the appropriate time periods, etc.

Your payroll company does not have all this information, and your CPA may not have the specific expertise to ask. Most CPAs which whom we have spoken say that they simply do not have the time to learn this whole new area of tax law.

The regulations governing the proper calculation of an ERTC claim are complex and proper filing requires a thorough familiarity with the CARES Act, the PPP Payroll Flexibility Act, and the Consolidated Appropriations Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act for starters as well as the accompanying IRS interpretations.

The use of ERC specialists can help prevent disaster and/or leaving money “on the table”.

How can I use my ERTC tax credit?

Although it is called a tax credit, it is most frequently received as a cash payment from the IRS. Unlike the restrictions on the use of PPP loans, there are no restrictions on how this payment is utilized.

Instead of taking a payment, a business can also elect for it to be used to offset future payroll tax payments.

How much does it cost to file for the Employee Tax Credit?

There is no fee to file an amended Form 941-x. The only fees involved would be those charged by the entity preparing the forms for you. For a completely free, detailed initial analysis to determine your eligibility and exactly how much your Employee Retention Credit will be, go to https://yourERTCsolution.com.

This evaluation does not obligate you to purchase any goods or services. Should you choose to move forward and have them file

The initial analysis to determine your eligibility and approximate credit is completely free. If, after you get your free analysis, you choose to continue and have your returns amended and filed for you, the fee is a percentage of the credit to be received. One of the many benefits of going with the nation’s largest firm specializing in ERC recovery is a lower fee for you due to efficiencies and experience.

How long does it take for the IRS to provide a refund after filing an amended Form 941X?

Early on, we were seeing refunds arrive in as little as 6-8 weeks. However, as progressively more businesses began applying, the IRS response time steadily increased. Currently, the average time between filing and getting the refund check stands at about 9 months.

The IRS response time is only likely to get longer so we recommend filing as soon as possible.

Can I still apply for the ERC if I use a Professional Employer Organization (PEO)?

Yes. Even if you use a PEO or CPEO to manage your employees, ultimately, you are still the employer. Using a PEO does not disqualify you from receiving an ERTC credit.

There is a difference in the process, however. Businesses that use PEO/CPEO services do not file an individual 941 with the IRS. Instead, the PEO/CPEO files an aggregate 941 that combines the information of several businesses. This changes the way the information must be reconciled to receive the credit.

Is an ERC credit taxable?

It is not considered income, per se. However, it reduces the amount of deductible wages a business can claim during the tax year for which they received the credit. This will increase the amount of taxes owed during that period.

What if I started my business after 2019?

A special category of business was created called a Recovery Startup Business (RSB). Special accommodations have been made for these businesses. The 2021 Infrastructure and Jobs Act removed the qualifying requirements of business closure or reduced gross income for RSBs. In addition, only RSBs can claim the ERTC credit for Q4 in 2021.

What is a Recovery Startup Business?

To qualify as a Recovery Startup Business, it must:

  • Have started operations after February 15, 2020
  • Have gross annual receipts of no more than $1M
  • It must not be eligible for the ERTC under either of the other two categories (a. partial or full suspension of operations, or b. decreased gross receipts). This is decided quarter by quarter. Meaning, if one of the other 2 qualifying categories applies in Q2 but not in Q3 then they would not be considered a recovery startup in Q2 but they may still qualify as a recovery startup in Q3. They are allowed to take a credit of up to $50,000 for Q3 and Q4 of 2021.

In its notice 2021-49, the IRS clarified that Recovery Startups are allowed to use all qualified employee wages when calculating their credit and that the number of employees do not affect this.

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]]> 18 https://covidtaxcredit2020.com/20-2/ Mon, 11 Jul 2022 03:05:52 +0000 https://covidtaxcredit2020.com/?p=20 Are ERC and ERTC the same thing? Yes. The full name of the program is the Employee Retention Tax Credit (ERTC) but it is more commonly shortened to the Employee Retention Credit (ERC). This name is also officially recognized. In addition, you may see it referred to by several other names such as: Employee Tax … Continue reading ""

The post appeared first on Employee Retention Credit faq.

]]> Are ERC and ERTC the same thing?

Yes. The full name of the program is the Employee Retention Tax Credit (ERTC) but it is more commonly shortened to the Employee Retention Credit (ERC). This name is also officially recognized.

In addition, you may see it referred to by several other names such as: Employee Tax Credit, Employer Tax Credit, Covid Tax Credit, etc. While they may not be officially sanctioned names, they all refer to the same program.

What is the Employee Retention Tax Credit (ERTC)?

The Employee Retention Tax Credit was created as part of the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) along with the better-known Paycheck Protection Program (PPP loans). This act was passed by Congress in an attempt to encourage employers to not lay off their employees during the lockdowns in 2020.

The Employee Retention Tax Credit is a fully refundable tax credit which means it is not limited by the amount of actual taxes paid and can be used to generate a federal tax refund that is larger than the amount of taxes paid during that year. This tax credit can be used to offset all Federal employment tax withholdings including federal income tax, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS.

It initially applied only to wages paid between March 12, 2020 and December 31, 2020 and the allowed credit was equal to 50% of the qualified wages that eligible employers paid during that period. The eligible wages were capped at $10,000 per w-2 employee resulting in a maximum credit of $5,000 per employee for 2020.

Under the provisions of the original plan, businesses had to choose between getting a PPP loan or applying for the ERC. You could not do both and most businesses opted for PPP loans.

In 2021 Congress approved the Consolidated Appropriations Act which made several important changes to the original plan. First, it made the ERTC available to businesses who had received PPP loans – regardless of whether or not the loans had been forgiven. Second, the credit was increased from 50% to 70% of eligible wages. Third, although eligible wages were still capped at $10,000 it was changed to $10,000 per quarter for Q1 and Q2 of 2021. This increased the annual maximum credit for 2021 to $14,000 per employee.

On March 11, 2021, the American Rescue Plan Act went into effect which kept the credit at 70% of qualified wages and did not change the $10,000 wage cap per quarter. What it did was extended the program through Q3 and Q4 of 2021 making the possible credit for the year $28,000 per w-2 employee. However in November, Q4 was taken away and the end date for the ERTC program was changed to September 30, 2021 for most businesses by President Biden’s Infrastructure Investment and Jobs Act.

Now only Recovery Startup Businesses are still eligible to claim an Employee Retention Credit through the end of 2021. This exception is explained in more detail in another answer.

In the end, the final max credit for most businesses in 2021 is $21,000 per employee in addition to the $5,000 per employee in 2020.

The IRS description and guidelines for this plan can be found at: https://www.irs.gov/coronavirus/employee-retention-credit

Does the Employee Retention Credit have to be paid back?

No. The ERC is a fully refundable tax credit – not a loan. It does not have to be paid back. 

Is ERC over?

 The short answer is: Yes, the program is over. Even so, you can still take advantage of it.

All though the program has ended, businesses can still claim the Employee Retention Tax Credit after the fact. As with other amendments to tax returns filed with the IRS, businesses have 3 years to determine if any of the wages they paid in 2020 or 2021 are eligible and to file their IRS Form 941x which is the form used to adjust an employer’s quarterly Federal tax return or to request a refund.

This means businesses have until 2024 to amend their 2020 returns and until 2025 to amend 2021’s. The specific deadline during those years will be the normal tax return filing date (either April 15 if filing as part of a personal return or the 15th day of the third month following the end of their tax year if filing a corporate return).

What Employers qualify for the Covid Tax Credit?

The ERC is available to a very broad range of businesses. Both for-profit and not-for-profit entities may qualify. Here are some examples of the types of businesses and organizations that have qualified for this program:

  • Restaurants
  • Education/Private Schools/Colleges/Universities/Trade Schools
  • Retail Stores
  • Hotels and Motels
  • Spas
  • Churches and 501(c) Organizations
  • Non-Profit Businesses
  • Industrial businesses
  • Healthcare
  • Professional Services
  • Real Estate
  • Construction
  • Technology Companies

The main category that is not eligible is government entities at the local, state, or federal level. Government contractors, however, can be eligible.

The bottom line is that most employers are potentially eligible if they had W-2 employees during 2020 and/or 2021.

More specific eligibility requirements include being:

  • Subject to government lockdown orders that fully or partially suspended operations during any calendar quarter and that limited commerce, travel, or group meetings due to concerns over the coronavirus.

– OR –

  • Had a significant decline in gross revenue during the calendar quarter.

It is important to point out that a business only needs to meet one of the two conditions to qualify. You do not need to meet both requirements. If you were subject to government lockdown restrictions, you probably still qualify even if you found a way to increase your revenue during that time.

It should be noted that businesses that were able to easily convert their employees to teleworkers and continue operations unimpeded have generally been found to not qualify for this program. Likewise, businesses deemed ‘essential’ will typically not qualify unless they meet the decreased revenue requirement.

Can churches or other religious organizations apply for the ERTC credit?

Yes. Any business – regardless of religious affiliation or lack thereof – that was adversely affected by government mandated capacity restrictions on gatherings or that that had a significant decline in gross receipts can qualify for the Employee Retention Credit program.

What Constitutes being Partially Suspended or Shut Down?

First, the business shutdown cannot have been a voluntary change in business operations. Normal business operations must have been limited due to a federal, state, or local orders that “limited commerce, travel, or the ability to meet in groups either for commercial, religious, or social purposes”. Stay at Home Orders for non-essential businesses, limits on the number of hours a business could be open, and capacity restrictions all fit in this category.

An example of partially suspended operations would be a restaurant that was forced to close its dining room but continued serve customers through carry-out or with a home delivery service.

Here is a partial list of qualifiers for ERC:

  • Increased time during shifts spent cleaning and sanitizing
  • A significant amount of time during shifts spent donning/doffing PPE
  • Limitations on how many people were allowed in your place of business
  • Unable to attend networking events as normal
  • Sales force was unable to function normally
  • Decreased operating capacity
  • Covid related issues in working with vendors
  • Decreased range of goods/services offered to customers
  • Decreased hours of operation
  • Changed hours of operation to allow for increased facility cleaning
  • Project cancelation or delay due to disruptions related to Covid
  • Supply chain disruptions

What if I was not shut down but was affected by supply chain issues?

Even if your business was not forced to either fully or partially suspend operations due to government lockdowns, there is still the second method of qualifying: decreased gross revenues. This decrease can be due to pretty much any cause – including supply chain issues. For instance, car dealerships and many other industries that rely on foreign manufactured products or parts have had difficulties due to things such as port closures in China or decreased output from Mexican manufacturing centers which had indoor capacity limitations.

What Qualifies as a Significant Decline in Gross Revenues?

Under the original terms of the CARES Act, a qualifying employer is one who experienced a decrease in gross receipts of 50% or more during a calendar quarter in 2020 when compared to the same quarter in 2019. If gross receipts during the following quarter increased again to reach a level equal to more than 80% when compared to the same quarter in 2019, then the employer no longer qualifies.

For 2021, the qualifications were adjusted in the Consolidated Appropriations Act and the reduction in gross receipts was reduced. A businesses experiencing a drop of 20% or more in gross receipts compared to the same quarter in 2019 now qualify for the program. For new businesses that do not have a 2019 quarter to use for comparison, the IRS allows the use of gross receipts from their first quarter of business to be used as the reference benchmark.

An additional option was added later in 2021 by the American Rescue Plan Act. Businesses now can choose to determine eligibility by comparing the gross receipts of a business quarter with the quarter that immediately preceded it. The corresponding quarter from 2019 is still available as an option as well.

Do forgiven PPP loans count as Revenue?

Maybe, and no.

Maybe: The forgiven portion of PPP loans may or may not be excluded from your gross revenue for the purposes of calculating income tax obligations based upon various factors. The details for determining this based upon your particular situation are beyond the scope of this report.

No: For the purposes of determining ERC eligibility, forgiven PPP loans are not to be included. In 2021 the IRS released Revenue Procedure 2021-33 that gave guidance allowing employers to exclude the amount of PPP loans forgiven, Shuttered Venue Operators Grants, or Restaurant Revitalization Funds from the definition of gross receipts – but only specifically in the context of determining their eligibility for the ERC program.

Can I apply for an Employee Retention Tax Credit if I received PPP loans?

Yes. Initially, as the program was laid out in the CARES Act, businesses had to choose between the PPP and ERTC programs and were not allowed to take advantage of both. This was changed in 2021 and businesses which received PPP loans – both forgiven and unforgiven – are now able to apply for ERC credit as well.

Can I file for the ERC Tax Credit if I haven’t yet filed for PPP forgiveness?

Yes. You do not need to wait until your PPP loans have been forgiven. However, if you are in this situation, it is advantageous to allocate the maximum available non-wage allowable costs to the PPP to be forgiven.

What is considered Gross Revenue for the ERC Credit?

For taxable employers, gross revenue includes:

  • Income from the sale of products or services less returns and allowances
  • Investment income including interest, dividends, rent received, royalties, and annuities even if the income is not derived from ordinary activity associated with the business’s primary trade or service.
  • It may be reduced by the adjusted basis of property used in the business or of capital assets sold.

For non-taxable employers, gross revenue includes:

  • Basically, it includes any money received.
  • Includes proceeds from any investments or grants.
  • It is not reduced by the adjusted bases of property used in the business or of capital assets sold.

How do I calculate the ERTC Credit?

The 2020 Covid Tax Credit is equal to 50% of qualified employee wages with a cap of $10,000 per employee for the year. The maximum credit is $5,000 per employee.

The 2021 credit is equal to 70% of qualified employee wages. The cap remains $10,000 but now resets for Q1, Q2, and Q3 making the maximum credit $21,000 per employee.

What are qualifying wages for calculating the retention credit?

As a general rule, any wages subject to FICA taxes will qualify for the ERC as do qualified health expenses as long as they were paid between March 12, 2020 and September 30, 2021 (or December 31, 2021 for Recovery Startup Businesses).

Wages paid from PPP loans that have been forgiven or are expected to be forgiven do not qualify for ERTC.

Determining what health expenses qualify can be complicated as the IRS has several ways to arrive at this number. Which one is most appropriate depends upon several circumstances and is a discussion beyond the scope of this report. The overly simplified answer is that, as a rule, they include the employer and employee pretax portions. The after-tax portion is probably not a qualified healthcare expense. The IRS explanation of this topic can be found here.

Are tipped wages included in the definition of qualified wages?

IRS notice 2021-49 clarified this point stating that tips would be included in qualified wages if these wages were subject to FICA. As a rule, this would mean if an employee’s tips were over $20 in the calendar month, then all tips would be included as qualified wages for the purpose of the ERC credit. If an employee’s total tips were less than $20 in the calendar month, then their tips are not subject FICA wages and do not qualify for the retention credit.

What employees qualify for the Employee Tax Credit?

They must be full-time employees.

In this instance, a full-time employee is defined as someone who worked at least 30 hours per week or 130 hours during the month in question.

Warning for those with PPP loans: The way employee full-time equivalent (FTE) is calculated for the PPP forgiveness report is different from the way it is calculated for ERTC purposes. Do not simply reuse that number.

In addition, there are some other restrictions which have been modified over time. Here is a summary:

Under the 2020 CARES Act:

Employers with more than 100 employees can only include the wages of the employees who were unable to work due to lockdowns or to decreased business volume. Wages paid to employees who were still able to perform their duties do not qualify even if these employees did not contribute directly to revenue generation. In addition, any paid vacation, sick days, or other paid days off included in the employer/employee agreement cannot be included in the ERTC calculations.

For employers with fewer than 100 employees, the rules are more lenient. Wages paid to all employees – both those working as normal and those who were unable to work – can be included in these calculations. The only exception is paid leave provided as part of the Families First Coronavirus Response Act.

Under the 2021 Consolidated Appropriations Act:

The upper limit on the number of employees for qualifying businesses was increased to 500.

Under the 2021 American Rescue Plan Act:

Some employers are now able to claim the credit against all employee’s qualified wages regardless of whether they have been prevented from carrying out their normal service. This allowance is for severely impacted businesses whose gross receipts for 2021’s Q3 are decreased by over 90% when compared to a comparable quarter from either 2019 or 2020.

How are large and small employers defined for the purposes of the ERTC Tax Credit?

When filing for the 2020 ERC, any employer with more than 100 average full-time employees – as measured in 2019 – is defined as a large employer.

For 2021, the cutoff was raised to 500 full-time employees – again based upon 2019 numbers.

Are Owner/Spouse Wages Included in Qualified Wages for the ERTC Credit?

Early uncertainty as to whether wages paid to a business owner or spouse could be included was addressed in IRS Notice 2021-49. In summary, it says that the wages paid to majority owners and their spouses are not qualifying wages but that wages paid to minority owners and their spouses may qualify.

Do wages paid to relatives of the business owner qualify for ERC?

According to IRS FAQ #59, wages paid to close relatives of a majority owner in the business do not qualify. Close relatives are defined as:

  • An owner’s child or a descendant of their children
  • An owner’s brother, sister, stepbrother, or stepsister
  • An owner’s father, mother, or any ancestor of either
  • An owner’s stepfather or stepmother
  • An owner’s niece or nephew
  • An owner’s uncle or aunt
  • An owner’s son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

What if I own multiple businesses?

All separate businesses which are held under common ownership that meet the IRS criteria for being considered a controlled group must all be evaluated together as a group for eligibility. After combining the data from all the separate entities, the qualifying tests are applied. If the combined numbers pass, then each of the entities qualify. In a case where the group’s numbers do not pass, then none of the member businesses qualify. If the combined numbers pass, then the ERTC is calculated and filed for each entity separately.

Businesses not considered part of a controlled group are evaluated on an individual basis.

What is the interaction of ERTC with other credits and funding sources?

Wages that have been included in other credits cannot be included again for the purposes of ERC credits. For instance, if an employee is included for a Work Opportunity Tax Credit, you cannot include them again for the Employee Retention Credit. Likewise, wages paid by forgiven PPP loans, a Shuttered Venue Operators Grant (SVOG), or Restaurant Revitalization Fund (RFF) are not qualifying wages.

Since ERC credits can be significantly larger than the amount received in these other programs, it is worth exploring the ERTC program even for businesses who got PPP loans or funds from these other Covid relief programs.

Can my CPA or Payroll System file for my ERC credit?

As is common with economic development business tax incentive programs, the Employee Retention Credit has a number of complexities that may impact receiving an accurate, optimized, and audit-ready number. It is vital to fully document the processes and procedures, create and keep organized records, and avoid areas of risk in light of a potential IRS audit of the claim at some point in the future – potentially several years after the fact.

The ERC has numerous issues such as Controlled Group criteria, documenting qualification methodology, coordination with PPP loans, allocating healthcare expenses to the appropriate time periods, etc.

Your payroll company does not have all this information, and your CPA may not have the specific expertise to ask. Most CPAs which whom we have spoken say that they simply do not have the time to learn this whole new area of tax law.

The regulations governing the proper calculation of an ERTC claim are complex and proper filing requires a thorough familiarity with the CARES Act, the PPP Payroll Flexibility Act, and the Consolidated Appropriations Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act for starters as well as the accompanying IRS interpretations.

The use of ERC specialists can help prevent disaster and/or leaving money “on the table”.

How can I use my ERTC tax credit?

Although it is called a tax credit, it is most frequently received as a cash payment from the IRS. Unlike the restrictions on the use of PPP loans, there are no restrictions on how this payment is utilized.

Instead of taking a payment, a business can also elect for it to be used to offset future payroll tax payments.

How much does it cost to file for the Employee Tax Credit?

There is no fee to file an amended Form 941-x. The only fees involved would be those charged by the entity preparing the forms for you. For a completely free, detailed initial analysis to determine your eligibility and exactly how much your Employee Retention Credit will be, go to https://yourERTCsolution.com.

This evaluation does not obligate you to purchase any goods or services. Should you choose to move forward and have them file

The initial analysis to determine your eligibility and approximate credit is completely free. If, after you get your free analysis, you choose to continue and have your returns amended and filed for you, the fee is a percentage of the credit to be received. One of the many benefits of going with the nation’s largest firm specializing in ERC recovery is a lower fee for you due to efficiencies and experience.

How long does it take for the IRS to provide a refund after filing an amended Form 941X?

Early on, we were seeing refunds arrive in as little as 6-8 weeks. However, as progressively more businesses began applying, the IRS response time steadily increased. Currently, the average time between filing and getting the refund check stands at about 9 months.

The IRS response time is only likely to get longer so we recommend filing as soon as possible.

Can I still apply for the ERC if I use a Professional Employer Organization (PEO)?

Yes. Even if you use a PEO or CPEO to manage your employees, ultimately, you are still the employer. Using a PEO does not disqualify you from receiving an ERTC credit.

There is a difference in the process, however. Businesses that use PEO/CPEO services do not file an individual 941 with the IRS. Instead, the PEO/CPEO files an aggregate 941 that combines the information of several businesses. This changes the way the information must be reconciled to receive the credit.

Is an ERC credit taxable?

It is not considered income, per se. However, it reduces the amount of deductible wages a business can claim during the tax year for which they received the credit. This will increase the amount of taxes owed during that period.

What if I started my business after 2019?

A special category of business was created called a Recovery Startup Business (RSB). Special accommodations have been made for these businesses. The 2021 Infrastructure and Jobs Act removed the qualifying requirements of business closure or reduced gross income for RSBs. In addition, only RSBs can claim the ERTC credit for Q4 in 2021.

What is a Recovery Startup Business?

To qualify as a Recovery Startup Business, it must:

  • Have started operations after February 15, 2020
  • Have gross annual receipts of no more than $1M
  • It must not be eligible for the ERTC under either of the other two categories (a. partial or full suspension of operations, or b. decreased gross receipts). This is decided quarter by quarter. Meaning, if one of the other 2 qualifying categories applies in Q2 but not in Q3 then they would not be considered a recovery startup in Q2 but they may still qualify as a recovery startup in Q3. They are allowed to take a credit of up to $50,000 for Q3 and Q4 of 2021.

In its notice 2021-49, the IRS clarified that Recovery Startups are allowed to use all qualified employee wages when calculating their credit and that the number of employees do not affect this.

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