- I – What Is The Employee Retention Credit (ERC)?
- II – Understanding ERC Eligibility Requirements
- III – Employee Retention Credit Pre-Qualification Form
- IV Welcome Call
- V – Factors That Affect ERTC Qualification
- VI – Document Gathering Process
- VII – Submit to ERC CPA Expert
- VIII – IRS Paperwork and Receiving Your Check
I – What Is The Employee Retention Credit (ERC)?
There is no questioning that the COVID-19 pandemic has had a detrimental effect on most small to medium-sized businesses. This is not only the case during the pandemic but has a lasting impact on businesses now and in the years to come. The good news is there are certain programs in place to help stimulate the economy and get eligible businesses the money back that they deserve.
Due to the nationwide financial crisis, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) to help get businesses back on their feet. Within this sizable document, a special section dedicated to the implementation of the Employee Retention Credit was born. This program was added specifically to help businesses like yours. This government program goes by a few different names which include the Employee Retention Credit (ERC), and the Employee Retention Tax Credit (ERTC).
According to the IRS website, an employer is eligible for the ERC if it:
- 1. Sustained a full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority.
- 2. Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.
- 3. Qualified in the third or fourth quarters of 2021 as a recovery startup business.
The Employee Retention Credit is a fully refundable tax credit for employers that qualify to amend a claim against certain employment taxes. The best part of this is that it is not a loan and does not have to be paid back. For most business taxpayers, the refundable credit is in excess of the payroll taxes paid in a quarterly tax credit generating period.
II – Understanding ERC Eligibility Requirements
The Employee Retention Credit (ERC) is a valuable refundable tax credit designed to support businesses that faced challenges during the COVID-19 pandemic. This credit applies to businesses that either continued paying their employees while being shut down due to the pandemic or experienced significant declines in gross receipts between March 13, 2020, and December 31, 2021. Eligible employers have the opportunity to claim the ERC for the specific period within these dates, whether on an original or amended employment tax return.
For the entire year of 2020, qualifying businesses may be eligible to receive a refund of up to $5,000 per employee. Similarly, for the first three quarters of 2021, businesses can claim up to $7,000 for each employee who was retained on the payroll during that time frame. Additionally, for recovery startup businesses, this eligibility extends until the end of 2021. As a result, businesses could potentially claim up to a total of $26,000 in refunds for each W-2 employee that remained on their payroll throughout the eligible period.
It is crucial to note that the ERC program is only applicable during the specified timeframes mentioned above. For businesses that qualify, the statute of limitations for claiming the 2020 ERC and the 2021 ERC is different. The deadline for claiming the 2020 ERC is set for April 15, 2024, whereas businesses have until April 15, 2025, to claim the 2021 ERC.
By understanding and meeting the ERC eligibility requirements, businesses can take advantage of this beneficial tax credit, providing much-needed support during the challenging times of the COVID-19 pandemic. It is advisable for eligible employers to consult with tax professionals or review official IRS guidelines to ensure proper compliance and maximize their potential benefits from the ERC program.
A significant opportunity has emerged for businesses seeking financial relief through the Employee Retention Credit (ERC). To qualify for the ERC, a business must now submit a revised Form 941X (Quarterly Federal Payroll Tax Return) for each eligible quarter. The ERC offers substantial benefits for eligible employers, but understanding the qualifications is essential for claiming this credit successfully.
For the 2020 ERC, most companies qualified as eligible employers under the Government Mandate Test, while the 2021 ERCs predominantly considered the Gross Receipts Test for eligibility. The following are some key qualifications for the Employee Retention Credit:
- Pandemic-Induced Shutdown: If your business experienced a full or partial shutdown due to pandemic-related restrictions, you could qualify for the ERC.
- Reduced Gross Receipts: Businesses that witnessed a drop in gross receipts by 50% or more in the same quarter of 2019 (for 2020) and below 80% in the corresponding quarter of 2021 may be eligible for the ERC.
- New Businesses: If your business was not operational in 2019, you can use the corresponding quarters from 2020 to determine eligibility.
However, the specific eligibility criteria vary based on the period you wish to claim the Employee Retention Credit:
- 2020 Quarters: If you had over 100 full-time employees in 2019, you can claim wages for retained employees who were not working during the qualified period. If you have fewer than 100 employees, you can claim wages for all employees, whether they were working or not.
- 2021 Quarters: The threshold has been raised to 500 full-time employees, providing greater flexibility for employers to claim the credit. Additionally, any wages subject to FICA taxes qualify, and qualified health expenses can be included in the calculation of the tax credit.
Many businesses, including those that received a Paycheck Protection Program loan (PPP) in 2020, wrongly believed they were ineligible for the ERC. Fortunately, these restrictions have been lifted, resulting in an increased number of eligible businesses.
If you have already filed your tax returns and now realize you are eligible for the ERC, you can retroactively apply by filling out the Adjusted Employer’s Quarterly Federal Tax Return (941-X). However, navigating the ERC process can be challenging, given its complexity and the IRS tax code’s extensive regulations.
Employers have a unique opportunity to benefit from the ERC, with over seven billion dollars in Employment Retention Credits already claimed by 60,000+ businesses through our highly specialized ERC program.
Our qualified ERC specialists follow strict IRS guidelines to ensure your business safely and efficiently secures the maximum entitled credit. We take pride in supporting you throughout the process and guaranteeing our work.
If you are unsure about your eligibility or have any questions, we invite you to avail of a complimentary pre-qualification check. Get in touch with us, and we’ll gladly assist you. Our no-obligation form includes a few unintrusive questions, allowing us to explore how we can serve your business best.
III – Employee Retention Credit Pre-Qualification Form
Welcome to the pre-qualification process for determining your business’s eligibility for the Employee Retention Credit (ERC). This form will help us gather some non-sensitive information about your company, including its name and basic contact details.
If you require any assistance while completing this form, please don’t hesitate to contact us; we are here to support you throughout the process. Our goal is to guide you seamlessly through the steps.
Next Step – Basic Company Information:
In this section, we’ll collect some essential details about your company, which will aid us in estimating your potential refund check. Understanding your estimated ERC is crucial in moving forward.
Estimated ERC Calculation for Your Business:
The following step involves entering the count of full-time W-2 employees for both 2020 and 2021. Remember that part-time employees are also eligible and can significantly impact your qualification. At this early stage, we are looking at a general overview, and it might seem a bit complex, but we’ll simplify it for you.
As you input the numbers, you will notice a green dollar amount estimate displayed at the bottom right corner of the page. This estimation is based on averages and metrics calculated from over 60,000 separate company filings.
It’s essential to note that this number is a representation of all six quarters of ERC eligibility, and not all businesses will qualify for every quarter. Additionally, there are several variables that determine your tax credit, which means your actual return could potentially be higher. This estimate does not guarantee credit or eligibility for ERC. Your final tax credit amount will be based on the actual documents submitted and the quarters your business qualifies for.
Don’t worry about the document collection process at this stage. Our primary focus is to provide you with an initial estimate to assess if your business might be eligible for the Employee Retention Credit. This way, we can avoid wasting your time on the rest of the process if your business doesn’t qualify.
Later on, we will guide you through the document collection process, keeping it as simple as possible and offering our assistance throughout.
Thank you for considering us for your Employee Retention Credit evaluation. Please proceed with the pre-qualification form, and we’re here to help whenever you need it.
IV Welcome Call
After completing the pre-qualifying form and if we haven’t already spoken with you, we would like to arrange a brief call at your convenience to guide you through the next steps. Typically, our welcome call and pre-qualification check are combined into one conversation.
Our White Glove Services aim to simplify the complex process, giving you a better understanding of the steps involved. Our ultimate goal is to create a comfortable environment and establish a relationship with you to determine how best we can fulfill your needs.
V – Factors That Affect ERTC Qualification
- Number of W-2s Determining the number of W-2 employees is a crucial starting point, as businesses without W-2 employees won’t qualify for the credit. There are six eligible quarters for ERTC qualification, expanding to seven if you are a recovery startup business. These quarters comprise Q2-Q4 for 2020 and Q1-Q3 for 2021, with a possible extension to include Q4 of 2021 for recovery startup businesses generating under $1 million in revenue.
In 2020, eligible employers must have had between 1 to 100 W-2 employees (excluding owners or majority shareholders). In 2021, the range expands to 1 to 500 W-2 employees (excluding owners and majority shareholders). Owners and certain family members are not counted in these numbers. If you are the sole employee of your business, you are unlikely to qualify for the program. Keep in mind that each applicable quarter is evaluated independently, so you may qualify for all, some, or none of them. Once the W-2 employee criteria are met, we proceed with a deeper qualification process.
Did You Pay Wages in 2020 or 2021? The ERC tax credit is calculated based on the percentage of W-2 wages paid. Wages paid to 1099 contractors do not count, as they are not considered employees for the program. Notably, wages paid to majority owners (those with over 50% ownership) and their immediate relatives, even if paid through W-2, do not qualify for the ERC program. For example, if two siblings jointly own a business with 50% ownership each, they are both considered majority owners due to their relationship, making neither eligible for the credit. However, wages paid to all other W-2 employees would still qualify for ERC. Additionally, Federal, state, and local governments, along with their instrumentalities, are not eligible for the ERTC program. However, nonprofit organizations and tribal government entities can benefit from the Employee Retention Credit.
When Did You Start Your Business? If your business was established before February 15th, 2020, the standard rules apply. However, if it started after this date, it falls under the category of a recovery startup business, offering some additional advantages. As discussed earlier, the business would only be eligible if it generated under $1 million in revenue.
Full-Time vs. Part-Time Employees A full-time employee is defined as someone who worked at least 30 hours per week or 130 hours per month in 2019. Remember that this question is based on the average number of employees in 2019. Part-time employees’ wages can also be counted towards the ERC calculation and are not subject to the 100 or 500 full-time employee limits for the years 2020 or 2021, respectively.
5. IRS Aggregate Rules for ERC
When a single owner controls multiple businesses, the IRS Aggregate Rules for the Employee Retention Credit (ERC) come into play, offering significant benefits. Under these rules, all the businesses can be treated as a single employer and grouped together for ERC purposes.
Several criteria apply to determine the eligibility for this aggregation:
a. Calculation of Qualified Wages: The total qualified wages for all the businesses are combined when determining the ERC. This can be advantageous for the owner as it allows them to maximize the credit amount.
b. Number of Average Employees: By aggregating the number of average employees across all businesses, the owner can determine if they meet the threshold for claiming the ERC. For instance, if the combined average number of employees exceeds the limit set for a particular year, the businesses might become ineligible for the credit.
c. Significant Decline in Gross Receipts: In the case of multiple businesses, the gross receipts of all entities are considered together to assess whether there has been a significant decline. A substantial decline in gross receipts is one of the key criteria for claiming the ERC.
For illustration, let’s consider an entity that owns two businesses. The first business employs 60 full-time workers, while the second has 50 full-time employees. While combining these businesses could be advantageous in many situations, there are exceptions. For example, during 2020, the ERC program had a cap of 100 employees to be eligible. Combining both businesses in this scenario would exceed the limit of 100 employees, rendering the entity ineligible for the tax credit.
It’s important to note that the eligibility criteria for the ERC changed in 2021, where the number of employees considered increased to 500. However, one exception to this rule is for actual wages paid to employees who did not work due to a government shutdown.
By understanding and utilizing the IRS Aggregate Rules for ERC, owners of multiple businesses can make informed decisions to maximize their tax credits and navigate the complex landscape of tax regulations more effectively. Always consult with a qualified tax professional to ensure compliance and to take full advantage of available tax incentives.
Ways to Qualify for ERC Tax Credits
Employee Retention Credit (ERC) is available to businesses looking to receive tax credits, and there are three primary methods to qualify for it:
a. Revenue Reduction: Qualification for ERC based on revenue reduction depends on the year in question.
- For the year 2020, businesses must have experienced a 50% reduction in gross receipts for a specific quarter when compared to the same quarter in 2019. However, if the revenue in 2020 later recovers to reach 80% of the 2019 level, the qualification will no longer apply.
- For the year 2021, businesses must have faced a 20% reduction in gross receipts for a specific quarter when compared to the same quarter in 2020. This provides a greater chance of qualifying for ERC during this year, and businesses can receive up to $7,000 per employee per quarter.
b. Supply Disruption: Many businesses that rely on vendors and suppliers can qualify for ERC through supply chain disruption issues. To qualify under this method, businesses need to ensure proper documentation for the IRS.
- The Nominal Impact Method requires a disruption that resulted in more than a 10% impact on the business. This can be due to decreased sales, inability to procure essential supplies, or any other significant impact on business operations.
- The No Other Reasonable Supplier condition states that the business must have been unable to find a suitable alternative supplier for the goods or products.
c. Full or Partial Suspension: This qualification applies to businesses that were affected by government shutdown orders or limitations. To claim ERC under this category, businesses must declare the government-mandated shutdown, specify the applicable time window, and explain how it affected their operations.
- The suspension test requires demonstrating that the business’s operations were either partially or fully suspended due to a government order during the pandemic.
It is important to note that even if a government restriction indirectly impacted a business’s operations, it may still qualify for ERC. However, this restriction typically applies only to 2020 operations, as few businesses received shutdown orders in 2021.
For many businesses falling under this category, a partial suspension due to a government order must have had more than a nominal impact, meaning it affected over 10% of business operations. This impact could result from a reduction in business hours exceeding 10% or a suspension of business operations representing 10% or more of gross receipts compared to 2019.
A crucial point to consider is that if a business effectively transitioned to remote work and the impact on operations was minimal, it would not qualify for the suspension qualification.
To find more details on ERC, refer to the IRS Notices: Notice 2021-23, Notice 2021-33, and Notice 2021-49. During the initial qualification process, all these factors will be evaluated, and if everything goes smoothly, businesses will receive an estimate of the money they can expect to receive. The next step involves gathering the necessary information to proceed with the claim.
VI – Document Gathering Process
This next stage remains crucial for ensuring accurate numbers and securing your refund. Our primary goal is not only to help your business claim the maximum eligible amount but also to ensure compliance with all IRS regulations, reducing the likelihood of an audit.
Efficiency is of utmost importance during the documentation process. Delaying this step can lead to extended processing times, causing frustration for some businesses. We strongly advise you to dedicate the time needed to gather the required documents promptly. Once you complete this part, you can leave the rest to our ERC processors, making it imperative to get it off your plate.
Thankfully, the list of necessary documents for filing the amended return is relatively short. Most of these documents should be accessible through your business computer, payroll manager, or business CPA. Here’s what we need:
- Payroll Documents / Payroll Journal A detailed payroll report that outlines all payments, deductions, contributions, and taxes for each employee during your ERC eligibility period. This information is essential for maximizing the ERC funds we can claim. The report should include the employee’s name, paycheck date, and gross wages.
- 941 Forms To accurately calculate your credit, we require the 941 forms for specific periods, including 2020 (Q2, Q3, and Q4) and 2021 (Q1, Q2, Q3). Additionally, if you filed any 941x forms during this period or claimed the WOTC (Work Opportunity Tax Credit) or R&D (Research & Development) credit, kindly include that information as well.
- PPP1 and PPP2 Forgiveness for 2020 and 2021 (if applicable) If your business availed of any PPP loans, it’s necessary to provide documentation for both PPP1 and PPP2 forgiveness, if applicable. Rest assured, you are still eligible for the ERC, but we will need to adjust the credit to account for the PPP loans.
- W-3 for 2019 The W-3 form is used by employers to report combined employee income. If you have distributed more than one Form W-2 to employees, you must complete and submit the W-3 form to summarize the total salary payments and withholding amounts. This information will aid in determining your W-2 comparisons for 2020 and 2021.
Though the list might seem extensive, these documents should be readily accessible with the right assistance. Once you have gathered and compiled these documents, please submit them through our secure portal, and we will handle the rest. Your business package will be forwarded to the ERC CPA Specialist for further processing.
VII – Submit to ERC CPA Expert
At this stage, the ERC specialist conducts a thorough review of the business’s documents, marking the final steps in the process. This phase is highly critical as strict adherence to IRS guidelines is essential and can also expedite the overall process. The workflow involves the following steps:
Document Validation A secondary check or quality control audit is conducted to ensure that all the required documents are present and properly formatted. The CPA meticulously verifies that everything is in order and there are no gaps in the documentation.
Document Revision If necessary, the CPA sends the documents back to the ERC specialist so that any required corrections can be made by the business owner. However, this step is less frequent, considering the nature of the document collection process.
CPA Final Calculation / Review Once all the documents are in order and returned, the CPA proceeds to calculate the numbers essential for completing the 941X forms. After filling out and revising all the necessary documents, the Doc package is ready for customer approval. At this stage, the client becomes aware of the final figures and whether they qualify for the ERC tax credits.
Tax Doc Package Sent and Signed The Tax Docs are sent back to the ERC specialist, who collaborates with the business to obtain final acceptance and agreement to the payment terms for the services rendered.
It’s important to remember that until this point, the business has not incurred any costs or been obligated to enter into a contract. This is where the business signs the agreement to pay for the services provided, but no payment is due until the IRS sends the corresponding check to the business.
VIII – IRS Paperwork and Receiving Your Check
As part of our white glove service, our CPA firm takes care of all the necessary paperwork for you. Our priority is to ensure that everything is done correctly and efficiently. Once we have filed the paperwork with the IRS, we closely monitor the progress of the filing and provide you with regular updates on the process.
Upon successful processing by the IRS, you can expect to receive your check from them within 1-2 weeks. The best part is that we don’t get paid until you have received your check, so you can rest assured that we are fully committed to your satisfaction.
If you are interested in availing our services, the first step is to fill out the complimentary pre-qualification check. By doing so, you can embark on the journey to reclaiming the money your business rightfully deserves.
We hope that you found our ERC Guide informative and that it has helped clarify any confusion surrounding the Employee Retention Credit program. We are confident that you will be pleased with our services, and we look forward to maintaining a long-lasting relationship with you and your business. If there is anything else you need assistance with, please do not hesitate to let us know.
Take advantage of our expertise today and let us help you with your IRS paperwork and the process of receiving your entitled check.