Overview
The Employee Retention Credit is a CARES Act fully refundable tax credit for businesses negatively impacted by the Coronavirus pandemic, who continue paying their employees during 2020/2021. In other words, it is a payroll tax credit/refund you get from the government via the IRS because your business was not able to operate normally.
ERT Credit amount
Maximum credit is $7000 per quarter per employee in 2021; and $5000 per year per employee in 2020. That means you could potentially receive $33,000 for each employee.
Employers who qualify for the current quarter can stop paying 941 payroll taxes, and will get a refund at the end of the quarter for the amount of the credit and payroll taxes that were paid with that credit.
Qualifications
Follow the steps below to determine if your business would qualify.
Determine if you were affected by the pandemic according to Cares Act criteria,
By government mandates that limit your business
Or determine if you had a 20% decline in revenue
Determine which wages qualify during that quarter (including medical insurance and tips), that were not paid with PPP money or Restaurant Revitalization Fund money.
Once the qualifying wages are determined, and it is certain the current quarter will qualify, the employer can stop making payroll tax payments for the rest of the quarter AND get a refund at the end of the quarter. Prior quarters' ERTC may be claimed on an amended 941.
Special notes
Claiming the ERTC may affect your income taxes: Of special note, the wages paid from the credit are not deductible on the income tax return. Therefore, if you are claiming for a prior year and have already filed your tax return then we will need to amend your income tax return to report the increased income; and likely amend your personal return as well.
If you have management control over more than one company, then all the companies must be considered in the aggregate regarding the drop in income and amount of qualifying wages per person.
Qualifying wages include employee's medical benefits and tips, but total credit is still capped at $5,000 per year per employee in 2020 and $7,000 per quarter per employee in 2021.
Wages paid to relatives, and S corporation owners, do not qualify.
What is this retention credit (ERTC)?
It was created by the CARES Act; extended and expanded by the Consolidated Appropriations Act December 2020 and the American Rescue Plan Act of March 2021
It is NOT the PPP forgivable loan.
It is NOT an EIDL loan.
It is a credit/refund you get from the government via the IRS because your business was forced to shut down or was restricted in some way due to government orders OR you had 20% drop in income for a quarter in 2021 compared to same quarter in 2019.
How much money are we talking about, if I had this drop in income or was restricted by govt order?
Up to $7000 PER EMPLOYEE, per quarter for all of 2021! Maximum is 70% of $10,000 wages paid to the employee per quarter. 2020 may also be amended for 50% of max $10,000 wages paid to the employer for the year.
Do my wages qualify if I am an owner?
Yes. If you an S corporation and you pay yourself wages, you should pay yourself at least $10000 per quarter so that you receive the $7000 for yourself also.
Is there a maximum retention credit refund I can receive?
No. But there are different rules for companies with over 100 employees, and also different rules if your retention credit is over $2 Million.
Can I get this retention credit even if I got the PPP money?
Yes. However you cannot use the same wages for both. Whoever files for the credit will have to coordinate both benefits such that the same wages will not be used for both programs.
What if I spent all my PPP money, does some of the wages I paid qualify for the retention credit?
The law was changed so that you only have to pay out 60% of the ppp for payroll, and the other 40% can be used for certain operational costs such as rent, utilities, phone, accounting, computer related costs, and other specific costs as well. You may not use the same wages for ppp and ertc. Therefore, if you use less wages for the ppp, then you have freed up more wages to be covered by the ERTC. *Hence do not complete PPP forgiveness until you determine what wages will qualify for ERTC. Once you ask for forgiveness, you cannot change your mind as to how much wages you want covered by ppp.
How long can I get this credit?
You get immediate relief by not paying your 941 deposits each month, or each payroll.
Can you imagine that? You don’t have to pay your 941 payroll taxes at all! And the remainder owed to you at the end of the quarter will be refunded to you when the quarterlies are done. You can do this for future quarters.
For past quarters, since you already paid all the payroll taxes, you will file an amended return to receive your refund.
I don’t have employees, but I am an LLC taxed as an S corporation. Surely I cant get the retention credit, can I?
Yes you can. Any employee can. And if you pay yourself wages as an LLC taxed as an S Corp, then you can pay yourself $10,000 and get $7,000 per quarter.
I have a payroll service, an accountant, a bookkeeper doing my payroll. How come they don’t know about this?
It takes very specialized knowledge in order to integrate all the pieces and rules in order to process it.
Here are the various items that affect the amount of credit
There has to be a drop of 20% in income compared to same quarter in 2019. or the govt restricted hours of operation and/or capacity AND there was a 10% drop in income and/or hours. Big payroll companies are not going to have this information.
Relatives being paid by your company may negate the owner eligibility for ERTC. But there is some debate about semantics that needs a CPA to help you decide how to proceed. A payroll company is not going to be able to do that.
Wages used for ppp cannot be used for ertc. There are ways to minimize ppp for payroll to be able to maximize wages for ERTC.
It still varies wildly on how someone calculates the ppp portion and the ERTC portion. If you do it sequentially you will have a different result than if you use a 24 week ppp forgiveness period and use wages for ppp that you cant use for ERTC, thereby maximizing both. The amount of wages used for PPP can be dropped to 60% freeing up those wages to be used for ERTC.
Once your sales increase to 80% over same quarter in 2019, then you do not qualify anymore
Does not include sales tax.
Must consider all of your businesses with common ownership, as one entity, for purposes of ERTC (and PPP)
Other very complex difference between ppp and ERTC
I have spent literally months researching this subject, and all the myriad of changes
Have I done the retention credits for other people
Yes. I have extensively prepared these returns. I have processed over 60 returns with this credit. Q3 and Q4 are to come. I have also applied for over 80 PPP applications successfully and have submitted the PPP forgiveness applications for many of them.
If have my own payroll person, I can just ask them to do it
That’s fine, but the rules are complex the way that the various programs interact; and qualifications for retention credit vs other programs like ppp if applicable. And if they didn’t do it to begin with, it sounds like they might not be very knowledgeable in this subject to process it to the maximum advantage.
How long does it take to receive the refunds?
If you qualify, Immediate relief by not paying 941 deposits. Quarter 2,3,4 would be refunded when they are processed by the IRS at the end of the quarter. But amending previous year and quarter is taking the IRS an extremely long time. They originally said 4 months but it might be more like 6-9 months.
How much does it cost for you to do this work?
Free initial consultation
Due to the complexity of the credit, Fees range $1000-$3125 per quarter for a typical $10,000-$80,000 retention credits per quarter. There are may be other fees involved if applicable: amending 2020 income tax return (business and personal), setting up Quickbooks to track Q4 ERTC, PPP#2 forgiveness.
Do I also help with PPP forgiveness applications?
I highly recommend it, since the way you request ppp forgiveness can have a big impact on how much
Does it matter if I already filed for PPP forgiveness?
Yes. If you have not filed for forgiveness, please wait. You have 16 months after you received the PPP to ask for forgiveness, even the bank might be requesting it now.
But, if you have already filed for forgiveness, you use the wages that were not used for PPP for ERTC
What if I was not in business in 2019?
Even you are in luck. They have just allowed new businesses to receive Recovery Startup credit for Q3 and Q4 2021 without showing a drop in income. You cannot be affiliated with a prior business. (you cant just stop your business and start a new one for purposes of the credit).
If I amend my return, will I be more subject to an audit?
While amendments are scrutinized a little more, if prepared correctly, amendments might be reviewed a little more closely but in my case have not resulted in more audits. I amend a lot of returns: I do a free review of my client's tax returns and usually find something extensive enough to warrant an amendment, about 65% of the time. Out of all my amendments, and my career, I have only had 2 audits related to other things.