Roadmap To The Employee Retention Tax Credit (ERTC) Claims Process

In the wake of COVID-19, many businesses have faced significant financial challenges. To help alleviate some of this burden, the Employee Retention Tax Credit (ERTC) was introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act.

This refundable credit offers substantial financial relief to eligible employers by rewarding them for keeping employees on their payroll during these trying times.

Suppose you're a business owner eager to take advantage of this much-needed assistance. In that case, our comprehensive guide will walk you through everything you need to know about claiming the ERTC grant - from eligibility criteria and calculations to filing procedures and common mistakes you should avoid.

Key Takeaways for the Employee Retention Tax Credit

• The Employee Retention Tax Credit (ERC) is a tax credit designed to provide financial relief to eligible employers negatively impacted by the COVID-19 pandemic.
• To be eligible for Employee Retention Tax Credit (ERC), businesses must meet certain criteria related to a decline in gross receipts or suspension of operations due to COVID-19 restrictions.
• Employers can claim up to 50% of qualified wages paid per employee each quarter, with a maximum credit of $5,000 per employee.
• To claim the ERC, employers must file Form 941 with the IRS and can retroactively claim the credit using Form 941-X.

What Is the ERC?

The Employee Retention Tax Credit (ERC) is a fully refundable tax credit designed to provide financial relief to businesses negatively impacted by the COVID-19 pandemic.

The primary purpose of this credit is to assist and encourage business owners like yourself to maintain their workforce by rewarding them with significant savings on their payroll taxes.

Under the ERC, eligible employers can claim 50% of up to $10,000 in qualified wages paid per employee each quarter.

How It Helps Businesses Impacted By COVID-19

The Employee Retention Tax Credit (ERC) offers vital support to businesses affected by the COVID-19 pandemic, providing much-needed financial relief and incentives to make companies keep employees on their payroll.

For instance, imagine a small restaurant forced to switch exclusively to take-out services due to government-imposed restrictions. As revenues decline significantly compared with pre-pandemic levels, this eatery can benefit from the ERC as it covers a portion of its staff's wages.

This alleviates some financial strain while allowing employees to remain employed and earn an income during these challenging times.

Eligibility Criteria For ERC

To determine if your business is eligible for the ERC credit, you need to understand the qualifying factors, including the decline in gross receipts and suspension of operations.

Qualifying Factors For Eligibility

One must consider several factors to determine whether their business is eligible for the Employee Retention Tax Credit (ERC). These are crucial in confirming that the business taxes meet the requirements outlined by the IRS. The qualifying factors for eligibility include:

• Experiencing a significant decline in gross receipts: A reduction of more than 50% in gross receipts when comparing a specific quarter in 2020 with the same quarter of 2019, or a reduction of over 20% in gross receipts when comparing quarters from 2021 with their respective quarters in 2019.
• Partial or full suspension of operations: This can be due to government orders related to COVID-19 restricting commerce, travel, or group meetings and substantially impacting normal business operations.
• Size of the workforce: Businesses that began operations after February 15, 2020, should have had an average of fewer than 500 full-time employees during any calendar quarter.
• Eligible wages: Wages paid after March 12, 2020, and before January 1, 2022, can be considered for the ERC. The credit applies to qualified wages paid to employees who could not work due to suspended operations or reduced hours.
• Restrictions on other tax credits: Employers cannot claim ERC on wage amounts for other payroll tax credits like Paid Sick Leave or Family Medical Leave Act (FMLA) related leave under the Families First Coronavirus Response Act (FFCRA).

As a business owner, evaluating these qualifying factors carefully and ensuring their accurate application while claiming the Employee Retention Tax Credit is essential.

Decline In Gross Receipts And Suspension Of Operations

To be eligible for the Employee Retention Credit, employers must have experienced either a significant decline in gross receipts or a full or partial suspension of business operations due to Covid-19.

A significant decline in gross receipts means that an employer's revenue during a calendar quarter in 2020 was less than 50% of its revenue from the same quarter in 2019.

Additionally, businesses may qualify for the credit if they were required by government orders to fully or partially suspend their operations during any calendar quarter.

This includes having to close their physical location due to Covid-19 restrictions.

It is important for business owners who believe they are eligible for the Employee Retention Credit based on these criteria and other factors to familiarize themselves with how it works and how best to claim it through IRS Form 941-X.

Calculating ERC Credits

Employers can determine qualified wages by considering various factors, including the employee's earnings, hours worked, and year of employment.

How To Determine Qualified Wages

To determine qualified wages for the Employee Retention Credit, employers should first identify their eligible employees, including those who were retained during business disruption or decreased gross receipts.

The maximum tax credit amount is based on qualifying wages paid to an eligible employee from March 12, 2020, to December 31, 2021. Qualified wages are generally defined as salary and wage payments made by an employer to its employees that would be subject to Medicare tax.

For example, if a small business had five full-time employees earning $50,000 each in 2020 and experienced a decline in gross receipts of more than 50%, it could qualify for the maximum credit of up to $5,000 per employee for two quarters in 2020.

Calculating The Maximum Credit

To determine the maximum credit for employee retention, businesses need to calculate 50% of qualified wages paid to eligible employees, up to a limit of 50 percent of $10,000 per employee.

This means an employer is allowed a maximum credit of $5,000 per employee for wages paid between March 13 and December 31, 2021.

It's important to note that if an employer received a PPP loan or other government assistance under Section 106(c)(4) or (5) of the CAA in any calendar quarter during the 2020 or Q1 2021 period, respectively, then they may not use those same qualifying wages towards calculating their ERC credits.

In addition, employers must keep accurate records and documentation of their payments made between March 13 through December 31st that qualify for ERTC.

Calculating the maximum credit available under Employee Retention Tax Credit requires careful consideration regarding who qualifies as eligible employees and what total amount was spent on qualifying wages throughout each applicable period.

How To Claim The Employee Retention Credit

To claim the ERC, eligible employers must file Form 941 with the IRS and can retroactively claim the credit using Form 941-X.

Filing Form 941 With The IRS

To claim the Employee Retention Tax Credit, eligible employers must file Form 941, Employer's Quarterly Federal Tax Return, with the IRS. Here are the steps:

1. Determine the total qualified wages paid and health care costs for each quarter.
2. Calculate the credit by multiplying the qualified wages and health care costs by the percentage of credit allowed for that quarter.
3. Report the credit on Line 11c of Form 941 for each quarter.
4. If the credit exceeds payroll taxes owed, employers can request a refund or use it to offset future payroll tax payments.

It's important to note that if you have already filed Form 941 without claiming the ERTC, you can retroactively claim it by filing an amended return (Form 941-X) for each quarter you paid qualifying wages. applying for advance ERC credit payments using Form 7200 is no longer available.

Remember to keep detailed records and necessary documentation when claiming the ERTC, including employee names, hours worked, pay rates, and evidence of a decline in gross receipts or suspension of operations. Seeking assistance from an ERC expert can also help navigate the application process and avoid common mistakes.

Retroactively Claiming The Credit With Form 941-X

If you've been paying qualifying wages to your employees but haven't claimed the employee retention tax credits (ERTC), you can still claim them retroactively. Here's what you need to do:

1. Download Form 941 - X from the IRS website or find it in your payroll software.
2. Ensure you have filed all necessary Form 941 for the quarters before filing 941-X.
3. Fill out Form 941 - X for each applicable quarter, ensuring that all information is accurate and complete.
4. Submit Form 941 - X, along with any supporting documentation, to the IRS.
5. Wait for approval from the IRS.

Remember, retroactive ERTC claims must be made within three years of the original tax return filing or two years from the date taxes were paid, whichever is later. Keep detailed records and consult with an ERC expert if necessary to ensure you are claiming all available credits.

Deadlines For Claiming The ERC

There are important deadlines businesses need to be aware of when claiming the ERC, including retroactive claiming deadlines and quarterly deadlines.

Deadline For Retroactive Claiming

Employers eligible for the Employee Retention Credit (ERC) can retroactively claim the credit for qualified wages paid after March 12, 2020. The deadline for filing a retroactive claim is three years from the original due date of Form 941, typically April 30th of the year following each quarter.

For example, employers have until April 30th, 2024, to file a claim for wages paid during the first quarter of 2021. It's important to note that employers cannot claim ERC twice on the same wages or use the same wages used in their Paycheck Protection Program (PPP) loan forgiveness application as qualified wages for ERC purposes.

Quarterly Deadlines

To claim the Employee Retention Credit (ERC), eligible employers must file Form 941 with the IRS every quarter. For example, to claim credits for wages paid in Q1 of 2020 or 2021, eligible businesses must submit their Form 941 by April 30th.

Remember that if employers claimed the ERC but later realized they were ineligible or made incorrect calculations, they should amend their payroll tax returns and repay any excess credits received.

Amending Payroll Tax Returns

If you've already filed your payroll tax returns and forgot to claim the Employee Retention Credit (ERC), don't worry. You can still retroactively claim the credit by amending your previous returns.

By filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, eligible employers can claim the ERC on qualified wages paid in each quarter they missed.

For example, if a business owner in 2020 claimed a PPP loan that they later repaid or was forgiven in full, they may be eligible to also retroactively claim the ERTC for that same period.

However, it is important to note that businesses cannot double-dip - meaning they cannot use both PPP funds and ERC credits towards the same wages.

Required Documentation For The ERC Claims

To successfully claim the Employee Retention Credit, employers must maintain necessary records and documentation, including proof of gross receipts and operating suspensions; read this article to learn more about what documents you need to ensure your ERC claim goes smoothly.

Necessary Records And Documentation

To claim the Employee Retention Credit, business owners must maintain accurate records of their payroll costs, employee headcounts, and gross receipts. Here are some necessary records and documentation to prepare for when claiming the credit:

1. Records of qualified wages paid to each employee eligible for the credit.
2. Supporting documentation on determining eligible wages, such as tax filings and payroll reports.
3. Proof of suspension of business operations or significant decline in gross receipts, including quarterly financial statements or bank statements.
4. Documentation showing which employees were retained during the covered period for which the employer claims the credit.
5. Forms 941 and 941 - X for every quarter that qualifying wages were paid, along with any other required forms or applications.
6. A copy of the business's PPP loan application if they received one.

By keeping accurate records and documentation, employers can ensure that they qualify for the maximum amount of credits available and avoid potential audits from the IRS. It is essential to consult an ERC expert to help navigate this process successfully.

Record-Keeping Best Practices

Business owners must maintain proper documentation and records to ensure a smooth process when claiming the Employee Retention Credit (ERC).

Proper record-keeping practices help businesses and clients accurately calculate their qualified wages, determine their maximum credit and support ERC claims made with the IRS.

In addition to these general practices, specific documentation is required for ERC claims related to the suspension of operations or decline in gross receipts. Business owners should retain governmental orders that force full or partial service suspensions and documents for calculating gross receipts during applicable quarters.

ERC And PPP Loans

The interaction between ERC and PPP loans is important, as employers cannot claim the ERTC for wages paid with forgiven PPP loan proceeds.

Interactions Between ERC And PPP Loans

Business owners who have received a PPP loan may still be eligible for the Employee Retention Credit (ERC). However, business owners should be aware of some interactions between the two programs and regulations.

For example, employers cannot claim the ERC on wages paid with PPP funds that were forgiven or used to pay for qualified expenses under the program. Additionally, if an employer claimed the ERC and was later approved for the forgiveness of their PPP loan, they must repay any overlapping amounts claimed as part of both programs.

How ERC Affects PPP Loan Forgiveness

If you've received a Paycheck Protection Program (PPP) loan, you can still claim the Employee Retention Credit (ERC). However, there are some nuances to consider regarding PPP loan forgiveness.

Any wages used to justify PPP loan forgiveness cannot also be claimed for ERC purposes.

For example, let's say that a business paid $50,000 in qualifying wages during a quarter and received a PPP loan of $20,000. The business could use the entire amount of their PPP loan funds as funds for payroll costs and therefore qualify for full forgiveness on their PPP loan.

In this scenario, none of the $50,000 in qualifying wages could be used towards the ERTC calculation because they were already applied towards obtaining PPP loan forgiveness.

It's worth noting that even if an employer is not eligible for ERC credits due to using all their qualifying wages on forgiven expenses under the Paycheck Protection Program (PPP), they may still benefit from reduced payroll taxes because of other programs such as Social Security deferral rules or similar.

Common Mistakes To Avoid When Claiming ERC

Avoid errors in ERC calculations, failing to meet eligibility requirements, or claiming ineligible wages. To claim the employee retention credit accurately and efficiently, you must seek assistance from an ERC expert or carefully follow IRS guidance.

Common Errors In Calculations

Calculating the employee retention credit is a critical part of claiming the credit, and it's important to avoid common accounting errors that could lead to an incorrect refund or penalty. Here are some common errors in calculations that business owners should avoid:

1. Claiming ineligible wages: Only wages paid to eligible employees count towards the credit. Determining which employees are eligible for the credit is essential as ensuring that only their wages are included in the calculation.
2. Using incorrect timeframes: The ERTC calculation requires employers to use specific periods when calculating qualifying wages paid. Ensure that you apply the correct period when calculating the credit.
3. Failing to account for gross receipts: Employers must consider changes in gross receipts when determining eligibility for the ERTC. Failing to account for gross receipts can result in miscalculations of qualified wages.
4. Incorrectly calculating employee work hours: Employers must properly calculate an employee's full-time equivalent (FTE) status when calculating qualified wages since this determines whether they qualify as eligible or non-eligible workers.
5. Mistakes in determining average annual compensation: The ERTC definition of qualified wages includes certain amounts paid for employee health coverage. However, errors may be associated with computing average annual compensation amounts.

By avoiding these common errors, businesses can accurately calculate their Employee Retention Credit and maximize their financial relief during challenging times caused by the COVID-19 pandemic.

Failing To Meet Eligibility Requirements

To claim the Employee Retention Credit (ERC), it's essential to meet all eligibility requirements. Failing to do so can result in a denial of the employee retention credit refund or even penalties and interest if there are inaccuracies on payroll tax returns.

One common mistake is claiming ineligible wages for calculating qualified wages, which may include wages paid to family members or individuals not employed by the business.

Another mistake is failing to show a significant decline in gross receipts that meets the threshold criteria for eligibility. For example, some businesses may have experienced a temporary dip in revenue but didn't qualify for ERC because their overall annual gross receipts remained stable or increased compared to previous years.

Claiming Ineligible Wages

It's important to be mindful of claiming ineligible wages when applying for the Employee Retention Credit (ERC). Employers must ensure that they only claim qualified wages, including certain health insurance costs and paid time off.

In one example, a business owner attempted to claim significant severance pay as qualified wages for an employee who had left the company. This mistake resulted in the employer being audited by the IRS and having to repay a portion of their ERC refund.

Additional Benefits Of ERC

The ERC can also interact with other tax credits and result in reduced payroll tax deposits, making it a valuable tool for eligible small businesses seeking financial relief during these difficult times.

Interaction With Other Tax Credits

In addition to providing financial relief during the COVID-19 pandemic, the Employee Retention Credit (ERC) can also interact with other employment tax credits that businesses may be eligible for.

For example, if a business claims the Work Opportunity Tax Credit (WOTC), it can still claim the ERC for qualified employee wages.

It's important to note that while these tax credit interactions are possible, businesses must consult with an expert or seek assistance from their payroll company when making such claims on their tax returns.

Reduced Payroll Tax Deposits

If you are an eligible employer claiming the Employee Retention Credit (ERC), you may also qualify for reduced payroll tax deposits. Under the ERC program, employers can claim a refundable payroll tax credit of up to 50% of qualified wages paid to employees affected by COVID-19.

This credit can be applied against employment taxes owed, and if it exceeds the amount due, any difference is refunded to the employer.

For example, if your company qualifies for $10,000 in ERC credits and owes $12,000 in employment taxes for a particular quarter, you only need to deposit $2,000 instead of paying the full $12,000.

Any remaining balance due after applying your expected ERC credits could be claimed as a refund or used to offset future taxes owed.

Frequently Asked Questions

1. What is the Employee Retention Credit?

The Employee Retention Credit is a tax credit available to eligible employers who experienced a significant decline in gross receipts or were forced to fully or partially suspend operations during the COVID-19 pandemic.

2. Who is eligible for the Employee Retention Credit?

Eligible employers include those who operate a trade or business and employ less than 500 employees, including tax-exempt organizations. Employers must also have experienced a significant decline in gross receipts or were forced to fully or partially suspend operations due to government orders related to COVID-19.

3. How much can I receive in tax credits through the Employee Retention Credit?

Employers can receive up to 70% of qualified wages paid between March 13, 2020, and December 31, 2021, with maximum credit amounts per employee set at $5,000 per quarter for both years combined.

4. How do I claim the Employee Retention Credit?

Employers must file Form 941 – Employer's Quarterly Federal Tax Return – along with IRS Form 941-X (for amended returns) in order to claim any credits they are entitled to receive. Additionally, businesses may need assistance from their payroll provider when it comes time for reporting annual compensation figures on W-2 forms, etc., which will be used towards calculating potential eligibility criteria under various provisions of this law, including wage-based incentives offered throughout the COVID period across industries nationwide based upon specific thresholds within each one's particular regulatory framework."

Conclusion and Summary for A Roadmap To The Employee Retention Tax Credit (ERTC) Claim Process

Mastering the Employee Retention Tax Credit (ERTC) claim process can be a complex and time-consuming task. However, by understanding the eligibility criteria and the necessary documentation, companies can benefit from the credit and obtain substantial relief to their payroll taxes.

The implementation of the Consolidated Appropriations Act in December 2020, which extended and expanded ERTC provisions, made the credit even more valuable and accessible to businesses. As a result, it is highly recommended that companies take advantage of this opportunity, especially during these challenging times, to receive maximum benefits from the ERTC.

In summary, while the ERTC claim process can be daunting, it is a valuable and effective means for businesses to obtain relief for their payroll taxes. By following the guidelines outlined in this article and consulting with tax professionals, companies can ensure that they are well-prepared to claim the ERTC and maximize their benefits.

Remember to keep accurate records and seek professional assistance from an ERC expert if necessary.

About Disaster Loan Advisors? Employee Retention Credit (ERC) Services

Disaster Loan Advisors? (DLA) is a trusted team of financial tax professionals and Employee Retention Credit (ERC) consulting specialists dedicated to saving businesses from lost sales, lost customers and clients, lost revenue due to financial and economic harm caused by the COVID-19 / Coronavirus disaster, Delta and Omicron variants, and other recession and inflation downturns in the economy.

Having worked with over 1500+ business clients navigate the SBA Economic Injury Disaster Loan (EIDL), Paycheck Protection Program (PPP), and Restaurant Revitalization Fund (RRF) programs, DLA further refined its expertise in the ERC Tax Credit IRS program having assisted more than 700+ companies with their ERC Claims. Assisting ownership groups with multiple business entities, multiple location business owners, and other complex situations that require an expert tax and accounting strategist to be brought in to assess the situation and create the most strategic path forward.

DLA further specializes in another key pandemic-era SBA / IRS program where business owners are leaving a lot of relief fund money on the table. It is the often misunderstood and confusing?Employee Retention Tax Credit (ERC) / Employee Retention Tax Credit (ERTC) program whereby company owners and partners can retroactively receive up to $26,000 to $33,000 back for each W-2 employee they had on payroll for the 2020 and 2021 tax filing years. Done correctly, these tax credits or cash refunds can be claimed retroactively for up to 3 years.?

It’s encouraged that business owners obtain professional assistance in going through the complex 941-X amended filing process to help your company maximize the full value of the ERC Credit Program, while staying safe and compliant within the complex IRS rules and regulations for claiming the ERC Credits.

DLA doesn’t charge a percentage (%) of your ERC refund like many companies are charging. Instead, DLA works on a reasonable professional flat-fee basis.

"If you are looking for an ERC company that believes in providing professional ERC services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors is a good fit for you."

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