How the IRS Wants to Give Employers Free Money (No, Really)
A lower threshold of gross receipt reductions should expand the pool of eligible employers to receive the Employee Retention Tax Credit (ERTC).
In order to claim the ERTC, a business must have experienced a decline in gross receipts by more than 20% in any quarter of 2020, compared to the same quarter in 2019.
This sounds too good to be true but it isn’t. The Internal Revenue Service (IRS), well actually Congress, wants to give employers — and that includes installing security contractors — money. The Employee Retention Tax Credit (ERTC) is a component of the CARES Act, which was passed last spring. The original terms of the ERTC were fairly exclusive and complicated and many businesses didn’t investigate it.
The latest congressional omnibus act, the Consolidated Appropriations Act, 2021, changed all that. It is still a little complicated so the press has stayed away from reporting on it, but your tax advisor should be able to help you to navigate its provisions.
Congress has now modified eligibility so that sole proprietors, limited liability companies, S-Corporations or C-Corporations are eligible if they have less than 500 employees as of December 2020. The only catch is that your gross receipts for any quarter of 2020 must have been 20% less than the same quarter of 2019.
In order to claim the ERTC, a business must have experienced a decline in gross receipts by more than 20% in any quarter of 2020, compared to the same quarter in 2019. There are two credits available: one for 2020 and one for 2021.
The credit for qualified wages paid between March 13 and Dec. 31, 2020 is 50% of qualifying wages paid during this period, but only up to $10,000 per employee of annual wages paid with a limit of $5,000 for 2020. The credit is 70% of qualifying wages per quarter, paid between Jan., 1, 2021 and before July 1, 2021.
In 2021, the allowable wage for each employee is $10,000 per quarter. You should note that the salaries of owners and family members will most probably not be eligible. But wait, it gets better. In 2021, each employee’s allowable wage amount is $10,000 per quarter. This means that your maximum credit per employee could be $14,000 ($10,000 x 70% x two quarters). The owner and family member exclusions remain in effect in 2021.
How to Understand Qualifying Wages
Qualifying wages is a critical term to understand, and the term refers to more than just gross pay. The rules are a bit complicated. The purpose of this article isn’t really to let you DIY the credit, but rather to help you understand if your business qualifies so that you can approach your tax professional.
Note: there will be firms popping up to get the credit for you, for a percentage of the credit. Stay away from these guys; it is better to go to your trusted tax advisors and let them do this for you.
Qualifying wages includes both full-time and part-time employees’ payroll amounts plus any qualified health plan expenses/premiums you paid on behalf of the employee to this figure. This generally includes both the portion of the health-insurance cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary-reduction contributions.
This is different than the Paycheck Protection Program (PPP) requirements as that program doesn’t allow you to include health benefits paid by employees with before tax payroll deductions. Keep in mind that for ERTC purposes the qualifying wages do not include amounts that the employee paid for with after-tax contributions.
Previously, ERTC and PPP were mutually exclusive. If you took one you couldn’t take the other. The good news is — and it’s significant — under the new legislation business owners are entitled to both the first and second round of PPP and the ERTC; so long as PPP funds and ERTC are not used to cover the same payroll costs.
Be sure to keep track of expenditures for each so that you can maximize the benefits of both PPP and ERTC, creating thousands of dollars in tax-free money!
Since 40% of PPP monies can be used for items other than payroll — such as mortgage interest, rent, utilities — be sure to use no more than the 60% of PPP money for payroll since those dollars can’t be used for the ERTC.
Next, PPP money can be spent on payroll and qualified expenses over 24 weeks from the day the disbursement is received. This is referred to as the “covered period,” so you should use PPP money for salaries paid in the last weeks in order to maximize the ERTC. It is important to strategize and work with your tax professional to maximize your benefits.
Mind Your Payroll Processing
One unpleasant aspect of the COVID-19 relief provisions is that they are focused on payroll taxes. Payroll taxes have traditionally been somewhat simple, and the payroll industry has a lot of small firms with limited knowledge.
The instructions for IRS Form 941 (the quarterly payroll report) went from two pages to more than 100 in 2020; as a result, many small providers were overwhelmed. This is not only a good time to reevaluate your payroll processing, but to pick up some easy money by claiming the ERTC for 2020.
If your business meets the 20%-reduction-in-sales rule for any quarter in 2020 compared to the same quarter in 2019 you can claim the ERTC for 2020 and the first two quarters in 2021. Keep in mind that the ERTC is worth different amounts for 2020 and the first two quarters of 2021.
For wages paid after March 12, 2020, and before Jan. 1, 2021, the ERTC can be applied to 50% of qualifying wages up to $10,000. This means a maximum of $5,000 per employee could be credited back to your company if it qualifies.
Claiming the ERTC is relatively simple, albeit for a tax professional. It is a refundable tax credit that is claimed when you report your total qualified wages for purposes of the ERTC for each calendar quarter on their federal employment tax returns (Form 941: Employer’s Quarterly Federal Tax Return).
Refundable means that if the credit exceeds your tax liability, the IRS will actually issue you a check (or you can apply it to your next quarter’s tax liability).
We live in interesting times, and now more than ever, smart business owners are spending time with their tax advisors so as to not leave easy money on the table.
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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