Update! The IRS announced on September 14, 2023, that claims for the employee retention credit, or ERC, won't be processed until at least 2024. The tax agency also plans to give tougher scrutiny to an existing queue of more than 600,000 requests. For more details on this important update, visit here.
It will never be easy looking back on those hard months of lock down during the pandemic. Nothing prepared us for the stark reality of what it would do to families, the nation, and especially businesses. Now, on the other side of the pandemic, the ERC (Employee Retention Credit) is one avenue, you, as a small organization, can pursue to see if you qualify for wage credits for business quarters within the 2020 and 2021 time span.
What is ERC?
Under the CARES Act of 2020, Congress provided two incentives for employers to retain employees, and provided a refundable credit for businesses, different for each year of the lock down. A credit, up to $5,000 per employee for 2020 and $7,500 for 2021 per employee for the year, was originally only available to tax-exempt entities and for-profit businesses.
Does your business meet either of these two events?
Your business was required to fully or partially suspend operation of business because of a governmental order due to COVID-19, or
You experienced a more than 50% decline in gross receipts during 2021 as compared to the same quarter in 2019. Or 20% decline during 2020 compared to the same quarter in 2019.
The premise is this: Once you reach the required decline in gross receipts, you may claim a credit for that quarter and the following quarter. If you have multiple quarters that qualify for the decline in receipts, you could claim for each of those quarters - every quarter until the end of the quarter in which gross receipts exceed 80% of gross receipts for the corresponding quarter in 2019 or 2020.
The first deadline is July 31, 2023.
The process is as follows:
Take the short test to ensure your business qualifies for credit. It is a short process, and you get instant results to know where you stand.
Work with your payroll provider to have your corrected forms for the IRS completed, and submit the necessary paperwork by July 31, 2023, for the quarters covering 1/1/2020 to 12/31/2020. For 2021, covered dates include payroll paid during 1/1/2021 to 9/30/2021.
We will help you determine if you are qualified and submit the necessary documents to the payroll provider to earn the credit.
Credit calculations explained
The calculations cover both qualified wages and qualified healthcare covered during the shutdown period. For Wages, this is deemed as Medicare wages (gross wages less certain pretax deductions, mainly health), and does not include any severance pay received. This number should correspond in the quarterly 941 form, line 5c.
For the health costs, note, it does not include any employer HSA contributions, or after-tax deductions. What is included? Employer FSA/HRA contributions from employers, employee pre-tax health deductions like medical, dental and eye care, and the corresponding employer portion of these deductions.
A note on gross receipts
There is some variance between for-profit and not-for-profit organizations. From your gross receipts of your for-profit businesses, take your total sales (less returns and allowances) and add any investment income like dividends, rents, annuities, interest and more, and subtract adjusted basis in assets sold.
For not-for-profit organizations, combine total sales (less returns and allowances) and investment or other income like grants, gifts, member dues, rent, interest, dividends and more.
Different conditions apply to different employee counts. For instance, in 2020 the ERC restricts the number to over 100 employees who worked full-time and were paid but not working. Whereas in 2021, the count shifts to 500 employees who worked full-time, and were paid but not working during the government shut down period.
The maximum eligibility for each employee (wages and healthcare premiums) is $10,000 per employee/per year in 2020 or 50%, and in 2021, by quarter, $10,000 per employee, or 70%. This translates to maximum annual credits of $5000 per employee in 2020, and $7,500 in 2021.
How to learn more
There are a fair amount of resources available to you as small business owners to better understand how the process works and its benefit to your company. Here is one resource to explore: Facts & Circumstances Related to Government Shutdown Orders (PDF).
As always, we are here to answer your questions and help you to get the most from this opportunity. Contact us today!