Clarifying Employee Retention Credits: How to Receive Payroll Tax Refunds
Created by Congress as a COVID-19 relief measure, the Employee Retention Credit (ERC) can offer refunds against 2020 and 2021 payroll taxes. Here’s how to tell if you qualify.
(Image: ArtemSam/stock.adobe.com)
One of the many COVID-19 relief measures hastily issued by Congress was the Employee Retention Credit (ERC). The ERC offers refunds against 2020 and 2021 payroll taxes of as much as $31,000 per employee, so the numbers can add up.
For many companies that were hard hit by COVID, the ERC was easy to apply for. The checks have taken a while to come, but we have quite a few clients that have received them.
I first wrote an article about the ERC in early 2021, and we explained how to get it. In the past few months, hundreds of “credit mills” have sprung up that telemarket to business owners offering to get the credit, for the “small fee of 20%.” This can amount to $40,000 for a $200,000 credit, something that a legitimate accounting company can do for $3,000 or less.
To make things worse, these aren’t established companies, they are mostly fly by night companies that prey on unsuspecting business owners with the promise of a quick buck, and assurances that the ERC is really a grant or that the IRS is too busy to audit you. This couldn’t be further from the truth.
The IRS is estimating that the amount of ERC fraud could reach a trillion -with a T- dollars, more than the Gross National Product of most countries. President Biden authorized the IRS to hire 85,000 new auditors and we get a feeling that those people might look into this.
The ERC is easy to qualify for if you understand all of the rules. Of course if you are busy running a business, you may be too busy to read the Act, its modifications and the Notices from the IRS that clarify their position. That is your accountants’ job, but, unfortunately, they may not be aware of some of the clarifications issued by Congress and the IRS, and anyway, who can blame them?
The ERC came about in March of 2020 as part of the CARES Act, and then was expanded greatly in December 2020 by the Consolidated Appropriations Act of 2021, which among other things eliminated the ban on the ERC if a taxpayer received a paycheck protection program (PPP) loan.
Congress then expanded the ERC to the last two quarters of 2021 in the American Rescue Plan Act of 2021, enacted on March 11, 2021, and, added, a new section to the Internal Revenue Code, (§3134). The IRS has placed 94 frequently asked questions on its website and issued a 102-page notice, Notice 2021-20, on March 1, 2020, purportedly to explain the 2020 ERC.
As if that wasn’t enough, on April 2, 2021, the IRS issued Notice 2021-23 concerning the ERC for the first two quarters of 2021. At 17 pages, it is easy reading compared to the previous 102-page notice. According to the IRS press release accompanying Notice 2021-23, the changes to the ERC for the first two quarters of 2021, include:
- The increase in the maximum credit amount,
- The expansion of the category of employers that may be eligible to claim the credit,
- Modifications to the gross receipts test,
- Revisions to the definition of qualified wages, and
- New restrictions on the ability of eligible employers to request an advance payment of the credit.
Here are some of the provisions of the ERC as modified.
If your company’s or organization’s gross receipts declined by more than 50% in some quarter of 2020, you automatically qualify. Unfortunately, most alarm companies have RMR that stayed fairly constant so they “failed” this test. What to do? Stay tuned and I will tell you later in the article. One little known fact is that if you did qualify for any eligible quarter in 2020, your eligibility continues through the quarter that 2020 gross receipts rise to more than 80% of 2019 gross receipts
If your company suffered a decline in gross receipts for the second quarter of 2020? Gross receipts which usually run a $100,000 a quarter dropped to $49,000. Fortunately, the next quarter, gross receipts bounced back to the usual $100,000 a quarter. In this situation, your company qualifies for employee retention credits for the second quarter and then again for the subsequent third quarter.
For 2020 employee retention credits, you can’t get more than $5,000 for an employee for the year and you get the credit only for wages you didn’t pay using paycheck protection program loans, and not for wages paid using other tax credits. Third, finally, while you can get employee retention credits for a 50% decline in the first quarter’s receipts, only wages paid after March 12, 2020 plug into the credit formula.
If your company’s gross receipts in quarter 4 of 2020 declined by more than 20% as compared to quarter 4 of 2019? You qualify for employee retention credits for quarter 1 of 2021. In 2021, employee retention credits can equal as much as $7,000 an employee for each quarter. If your gross receipts in the first, second or third quarter of 2021 declined by more than 20%, you qualify for employee retention credits for either one or two quarters. You’ll qualify for the quarter with the decline. And if the quarter is the first or second quarter, you’ll also qualify for the subsequent quarter.
If a federal, state or municipal government order fully closed your business due to COVID-19, wages you paid employees during the closure probably count for employee retention credits for 2020 and for the first three quarters of 2021. If a federal, state or municipal government order partially closed your business due to COVID-19, and that partial closure was more than just nominal, wages you paid during the partial closure probably count for employee retention credits in 2020 and for the first three quarters of 2021.
The IRS defines nominal as 10% or greater. Further, the IRS rule looks at either hours of service or gross receipts As with a full closure, only wages paid during the partial closure count. These are both a bit tricky so make sure that your tax pro understands the ERC.
A government order that fully or partially suspends, not your company, but a supplier you rely on can qualify you for employee retention credits, too. We have a client who wasn’t able to get 5G radios in a timely manner. When they did get them there was no time to negotiate with customers to get any payment. We believe that they may qualify due to the lost revenue due to having to replace 3G radios and the supply chain issues and we are getting a Technical Ruling from the IRS.
If a government order closed down a company’s physical office location, and employees can successfully telework, that doesn’t count as a full or partial suspension, but, if employees can’t telework (think installers and service techs), the closing of the physical office location counts as a partial suspension. If you did transition to remote work, and the transition took two-weeks or longer of transition time, the IRS says that creates a partial suspension.
If a government order closed a customer, or group of customers, and this caused a nominal reduction in revenue, it may qualify you. We have a client that had a major fire alarm client, with 17 locations, close for 10 weeks. This caused their fire service and inspection revenue to drop by 15% in that quarter. They didn’t have the requisite drop in total revenue, but they most probably qualify for the ERC. We are requesting a Technical Ruling from the IRS.
Technical Rulings are significant because, if the IRS rules in your favor, you are entitled to take the credit. It is in essence a get out of jail free card. The IRS issues Technical Rulings because they have no issue with you taking a credit that you are entitled to, as long as you truly are entitled to it.
So you see, all is not lost. Business owners have been through some tough times. Many of us have taken extreme measures to retain employees. We are most certainly going to endure a recession in the next few months, and don’t count on the government to help you.
Talk to your tax professional and see if you might qualify for the ERC. You want to make a well informed decision and that means taking a credit you’re truly entitled to. It also means not having all 85,000 of President Biden’s auditors show up at your door with pencils and calculators in hand. If you have any questions, email me at [email protected]. We are glad to help.
Mitch Reitman is Managing Principal of Reitman Consulting Group, a member of the SSI Editorial Advisory Board and an SSI Industry Hall of Fame inductee. He can be reached at (817) 698-9999 or [email protected].
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