Our firm, Heintz and Clark, is seeing a lot of confusion around the Employee Retention Credit. For reference, Forbes stated in a February 2022 article that “IRS management anticipated that approximately 70%-80% of small and medium businesses (as well as tens of thousands of charities) were good candidates for taking the ERC” and that “the reality is — to date the actual numbers of businesses and charities applying for the ERC — is far below that. Small and medium businesses (as well as tax-exempts/charities) are leaving billions of dollars on the table.” Of the businesses and non-profits that we’ve talked to, we’re seeing approximately that same 70%-80% that we feel qualify. If you are not sure, we strongly recommend you talk with a CPA or accountant that has thoroughly researched this credit. Many CPA firms are telling businesses they don’t qualify if they didn’t experience the decline in gross receipts. These businesses are potentially leaving a very significant amount of money on the table.
The Employee Retention Credit (ERC) is a payroll tax credit against federal payroll tax for qualifying wages paid from March 13, 2020 through September 20, 2021. It is a credit for employers that kept their businesses going and retained their employees during Covid. The ERC was originally created in the CARES ACT of 2020, and was adjusted with the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021.
Who Qualifies for the ERC?
Most business, including colleges, universities, hospitals, and 501-C non-profit organizations could qualify following the American Rescue Plan Act. Originally, entities who took a Paycheck Protection Program (PPP) loan were not eligible, but this was changed with the Consolidated Appropriations Act.
There are two factors to consider in determining if an entity qualifies for the ERC, and a business only needs to qualify under one of the factors. The first is a significant decline in gross receipts. The calculation for the decline in gross receipts changed with the various Acts mentioned above. Generally, it is a 50% decline in 2020 and 20% for 2021. The calculations are determined by comparing a specific quarter to a previous quarter.
The second factor is not as straightforward. An entity can qualify if they experienced a full or partial suspension to their operations due to any Federal, State, or local government order, if the order limited commerce, travel, or group meetings due to Covid-19 in a manner that affects an employer’s operation of its trade or business. We are seeing businesses qualify for a wide variety of reasons related to this option of qualification.
We also caution working with a company that tells a business they qualify without doing any due diligence on the business. You may have heard advertisements from companies working on this credit. We are finding quite a few new companies with no previous experience in taxes providing this service.
What Wages Qualify?
Wages between March 13, 2020 and September 30, 2021 qualify, with some exceptions. First, they are capped at $10,000 per year for 2020 and $10,000 per quarter for 2021. Second, there is no “double-dipping” allowed in regard to the PPP and other credits or grants received. Third, wages of 50% or more owners and their immediate relatives also are not eligible. Finally, there are exceptions related to “large employers” (100 full-time employees in 2020 and 500 full-time employees in 2021). These exceptions can make the calculation quite complex. We feel IRS audits will focus on the calculation of the credit, so we strongly recommend working with a company well-versed in this.
How Much is the Credit?
The credit is 50% of wages in 2020, up to the maximum of $10,000 mentioned earlier, for a max of $5,000 per employee. For 2021, the credit is 70% of wages per quarter for Q1-Q3, up to the maximum of $10,000 wages per quarter mentioned earlier. This is a maximum credit of $21,000 per employee for 2021, for a grand total of $26,000 per employee.
How do I Claim the Credit?
The credit is claimed by amending your IRS Form 941 quarterly payroll filing for each qualifying quarter. Once the qualifying wages and credits are calculated, the forms can be relatively easy to complete. If they are not completed correctly, the IRS will send them back to be fixed. If the returns are completed accurately, the IRS will mail a check for each qualifying quarter. At the time of writing this article, we are seeing wait times of approximately 2-3 months for the refunds to arrive.
