ERC Explained: 5 Tips for Claiming the Employee Retention Credit
Have you applied to claim the Employee Retention Credit (ERC) yet? The ERC was designed to reward employers who strived to retain their employees during COVID-19 despite significant revenue loss or government mandated limitations on their business operations. It can be claimed on the quarterly 941 filing or through an amended 941-X form. This is a great opportunity to potentially earn a substantial tax credit for your business. Here’s a glimpse of what it could mean for you:
For qualified employers including PPP borrowers, the credit can be claimed for 50% of qualified wages and health plan expenses up to $10,000 per employee annually for wages between March 13th, 2020 and December 31st, 2020. The credit could be worth up to $5,000 per employee for 2020.
For qualified employers including PPP borrowers, you can claim against 70% of qualified wages and health plan expenses up to $10,000 per employee per quarter in 2021. The credit could be worth up to $7,000 per employee per quarter for 2021.
The process of confirming whether you are qualified for the ERC may seem complicated due to the bill’s intricacies and it is overlapping within the PPP loan timeframe, but that doesn’t mean you should stray away from its benefits.
Here are some tips that you can consider that may ease the stress of applying for the credit:
Make sure you are eligible. There are two ways to qualify for the ERC. The credit is available to businesses with operations that are either fully or partially suspended by a COVID-19 governmental order during the period the order is in force; or has a significant decline in gross receipts. The covered period for a significant decline in gross receipts begins on the first day of the quarter in which the decline occurs and ends on the last day of the quarter in which gross receipts recover to 80% or greater compared to the same quarter in 2019. For 2020, the decline must be 50% or greater during a 2020 calendar quarter compared to the same period in 2019. For 2021, the provisions are relaxed, and a business can qualify with a 20% or greater decline in gross receipts in a 2021 calendar quarter compared to the same period in 2019. Employers can also qualify for Q1 2021 based on 20% or greater decline in gross receipts using a lookback period of Q4 2020 compared to Q4 2019.
Know your PPP loan information. Have you already applied for a PPP loan? If so, it’s important to keep your loan information on hand and available, especially if you plan to work with your accountant to determine your ERC amount. Your accountant will need your PPP loan forgiveness period in order to know which payroll dollars you have already claimed for PPP loan forgiveness (or will need to use towards loan forgiveness if not already applied for) to accurately calculate your credit. This brings us to our next tip…
Don’t double dip. Wages and health plan expenses used towards PPP loan forgiveness are not eligible for the ERC. Expenses that were reimbursed by Family First Coronavirus Response Act cannot be used towards PPP loan forgiveness OR the ERC. The allocation of expenses gets even more complicated if your business claims wages towards other tax credits like the Work Opportunity Tax Credit or Research and Development Tax Credits.
Keep all your documents. With all of the new legislation and tax guidance released this past year to address the COVID-19 pandemic, it’s even more crucial to safely store all of your tax records to prepare yourself for an IRS audit or SBA examination. There have already been many reported instances of fraud and abuse relative to COVID relief programs – it is imperative that businesses retain appropriate records if regulatory scrutiny increases.
Consult with a professional. Applying for various credits and loans all while making sure your information is accurate and adhering to tax guidance is incredibly daunting to say the least. If your business doesn’t currently utilize a tax professional, this year is the perfect time to start. Get expert advice on interpreting recent tax guidance to ensure you are following the rules so that you can receive the support you need to keep your business running.
If you need guidance on next steps for applying, we encourage you to reach out to your trusted advisor. Fleming Advisors would be happy to help with your ERC questions, contact us here to schedule an introductory call with one of our experienced team members.