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May 01, 2023 Drew Schildwachter

How ERC Payroll Calculations Work (And Other ERC FAQs)

How ERC Payroll Calculations Work (And Other ERC FAQs)

The Employee Retention Credit motivated employers to keep their employees on the payroll during the height of the pandemic, but now widespread confusion is hampering CPAs and tax professionals from giving their clients accurate information about claiming the credit. It’s such a problem that the National Association of Tax Professionals and the National Society of Accountants recently issued a letter to the IRS requesting “immediate guidance” for tax professionals who need to help eligible clients take advantage of the ERC. 

From ERC payroll calculation questions to eligibility and deadline confusion, CPAs might run into a host of problems when helping clients prepare amended 941-X forms to claim the credit they earned. The letter drafted by the NATP and NSA points out that some tax professionals haven’t done ERC filings before and are unfamiliar with how they work. Making errors could expose them to penalties under Circular 230 and Title 26. 

(Note that the IRS has recently issued guidance to help taxpayers identify ERC schemes, which CPAs do need to be aware of. The bad actors running these schemes could convince your ineligible clients to go around you to try filing a claim for a credit that they didn’t earn.)

While we wait to see if the IRS issues any further guidance to tax professionals specifically, here’s an overview of some common questions that CPAs new to this tax credit might have—including how ERC payroll calculations should be handled. 

Which Clients are Eligible for the ERC? 

The Employee Retention Credit was initially established as part of the CARES Act in March 2020, allowing eligible employers to claim a tax credit against their employment taxes for employee wages they paid out during the pandemic. The ERC was subsequently amended three times during 2020 and 2021. Some of the changes created by those amendments have added to the confusion that business owners and their CPAs might be experiencing, including shifting eligibility requirements. 

Ultimately, the IRS has settled on three criteria for ERC eligibility. To qualify for the credit, an employer must meet one of the following:

  • They experienced a “full or partial suspension of operations due to government order due to COVID-19.” Figuring out if, when and for how long a business met this criterion can be complicated. The “due to government order” piece is key. For example, if a non-essential business voluntarily restricted its hours after a government order was lifted, it might not qualify for the ERC on wages paid during that period. A non-essential business that could continue its operations by switching to telework may also be ineligible. 
  • They experienced a "significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.” The IRS uses a business’s 2019 gross receipts as a yardstick to determine whether any 2020 or 2021 declines were “significant.” If its gross receipts in any quarter of 2020 were less than 50 percent of its gross receipts for the same quarter in 2019, the business is eligible to claim the ERC for that quarter. For the first, second and third quarters of 2021, the ERC may apply if the business’s gross receipts were less than 80 percent of what they were in 2019. (A business that didn’t open until 2020 may qualify for the ERC on 2021 wages by comparing its 2021 receipts to 2020.) 
They were established as a “recovery startup business.” This category includes new businesses that started after February 15, 2020, had average annual gross receipts under $1 million and don’t meet the other two eligibility criteria. These businesses are eligible for the ERC for the third and fourth quarters of 2021 only. 


What’s the Deadline for Filing Amended Returns?

If an eligible company hasn’t yet claimed their ERC credit, they’ll file Form 941-X to amend their original tax return from 2020 and/or 2021. The IRS's three-year deadline for amending a previous return gives clients until April 2024 to claim a credit for eligible 2020 wages and until April 2025 to claim a credit for eligible 2021 wages.  


What Do CPAs Need To Know About ERC Payroll Calculations?

Accurately calculating the value of a client’s Employee Retention Credit is obviously complex. For one thing, ERC payroll calculations are handled differently for 2020 and 2021. 

  • If a client qualified for the ERC during 2020: 50 percent of qualified wages are eligible for the credit, up to $10,000 in wages per employee per year, for a maximum credit of $5,000 per employee for 2020. 
  • If a client qualified for the ERC during Q1, Q2 or Q3 of 2021: 70 percent of qualified wages paid out are eligible for the credit, up to a maximum of $10,000 per employee per calendar quarter, for a maximum credit of $7,000 per employee per quarter. 
If a client qualified for the ERC as a recovery startup business in Q3 or Q4 of 2021: 70 percent of qualified wages up to $10,000 are eligible for the credit, for a maximum credit of $7,000/employee per quarter; these businesses are limited to a total credit of $50,000 per quarter. 

When doing specific ERC payroll calculations, CPAs also have to account for the fact that any wages forgiven under PPP loans don’t count toward the credit. Also, FFCRA Credits (wages credited due to qualified Covid absences), Restaurant Revitalization Grants, Shuttered Venue Operators Grants, and WOTC are excluded from qualifying as eligible wages. Furthermore, employer paid health care expenses count toward an employee’s qualified wages. CPAs and their clients have to be able to pull together a lot of payroll data from 2020 and 2021 to do these calculations correctly.

What Are a CPA’s Responsibilities to Clients in Terms of Due Diligence Around ERC Filings? 

This is the issue at the crux of the NATP/NSA’s joint letter, and it poses five specific questions to the IRS. They include “What is our due diligence if we do not agree that the client qualified for ERC or discover improper ERC filings?” and “What is the tax professional’s exposure to Circular 230, or even Title 26, tax preparer penalties?” In light of the ERC fraud the IRS has warned about, tax professionals are rightfully concerned about wading into these issues when they’re not experienced with ERC filing or how to approach ERC calculations. 

Need Help with a Client’s ERC Filing? 

While we wait for more IRS guidance, CPAs in ConnectPay’s Accountant Partnership program can reach out today for help with ERC claims. As your clients’ payroll provider, ConnectPay is perfectly positioned to help with ERC payroll calculations and complete the 941-X so every eligible client can get their maximum credit. How can ConnectPay make ERC filing easier for you and your clients? Let’s connect today. 

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Published by Drew Schildwachter May 1, 2023