Many small business owners are overwhelmed and exhausted – and rightfully so. Not only has it been a hard year for small businesses, but the constant introduction of new legislation and state mandates have made it difficult to prepare for the future. In fact, even the programs that were created to provide relief for small businesses have come with their own confusing and time-consuming intricacies to navigate through.
Of course, the Employee Retention Credit has been no different. With the most recent hundred-page IRS notice and numerous updates released from SBA (and more on the way), there’s a lot of information to wade through.
But don’t let that stop you! This program has the potential to provide you with a lot of much-needed support – and we’re here to help you figure out the details. To make the information more digestible for you, our webinar walks you through the ins and outs of ERC and how it relates to PPP and Loan Forgiveness.
As a recap, we’ve also outlined the most important things you need to know about ERC below.
What Is The Employee Retention Credit?
ERC is a refundable tax credit that reimburses employers for certain employment taxes due to COVID-related hardships. There are two versions of ERC – one that’s for 2020 and one that’s for 2021. Let’s focus on the 2020 version first!
ERC For 2020
How Do I Qualify?
Employers are eligible for the credit if they paid qualified wages between March 12, 2020 and December 31, 2020 AND their business was shut down fully or partially due to government order OR their business suffered at least a 50% decline in gross receipts as compared to the same quarter in 2019.
Once eligible, ERC is available for each following quarter until your gross receipts have recovered to 80% of what they were in 2019. We recommend working with your CPA to determine whether your receipts were down enough to qualify.
But What Are Qualified Wages?
Qualified wages are any wages paid to employees during the period of gross receipt decline (including certain health plan costs), up to $10,000 per employee. If operations were suspended, qualified wages must be equivalent to what an employee would typically be paid had the operation been running.
Employees not eligible for the credit include:
- Employees with 50% or more ownership in the business
- Employees that are also family members
Are There Any Other Exceptions?
Yes – you cannot double dip. On top of the employee exclusions, any wages counted toward the Families First Coronavirus Response Act (FFCRA) or covered by PPP credits will not be considered eligible wages for ERC. On March 1, 2021, the IRS issued Notice 2021-20, a 102-page document that provides additional guidance on how to differentiate between PPP and ERC looking backwards. If you applied for forgiveness, make sure to work with your CPA for further guidance so that the same wages are not used twice.
How Much Could My Credit Be?
If you determine you qualify for the credit, you will be credited 50% of the first $10,000 worth of qualified wages you paid to each employee between March 12 and December 31. In other words, you could potentially receive a total credit of up to $5,000 per employee.
How Do I Apply?
Amendments will be required in order to receive ERC. Once you’ve established your eligibility period, you and your accountant will need to request your payroll reports. Remember, non-qualified wages must be removed from the reports.
Once your credit amount is established and documented, your payroll company can file the 941X, which is an amended paper form, for each quarter impacted. After the IRS processes these forms, they will send the refund checks out.
When Should I Apply?
941s can typically be amended for up to three years, which means you have plenty of time to digest the guidance and make a plan. You do not need to file for amended returns right now – in fact, we recommend you don’t. Waiting is key when dealing with evolving programs like these, especially when guidance keeps changing! Talk with your CPA – they will have more time after tax season – and consult with your payroll company to move forward on a timeline that makes sense for you.
ERC For 2021
It’s also important to remember that you can qualify for ERC for each quarter in 2021. However, full guidance has not yet been released for this version of ERC, especially when it comes to PPP2.
What Do We Know So Far?
The 2021 version of ERC provides a larger credit opportunity and less eligibility requirements. Those eligible for the 2021 credit need a 20% or more decline in gross receipts when comparing the first quarter of 2021 to the first quarter of 2019. For this version, the credit covers 70% of the first $10,000 worth of qualified wages paid to each employee, for each quarter. This means that you could potentially receive up to $7,000 per quarter for each employee, or $28,000 per employee for the year.
How Can ConnectPay Help With ERC 2020 and ERC 2021?
We will be filing a 941X on behalf of our clients who were on our service during the affected quarters. For any questions or to request your payroll reports, please reach out to your Payroll Specialist directly.
If you’re not a current client but still need assistance navigating ERC, we’re always here if you need to talk. You don’t have to go through these confusing times alone. Please feel free to contact us if you need further guidance – we’d be happy to help!