ERC experts

The Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) was signed into law on March 27, 2020. It included two programs to help businesses keep workers employed: the Payroll Protection Program (PPP) is administered by the Small Business Administration and the Employee Retention Tax Credit (ERC) is administered by the Internal Revenue Service.

PPP funds are distributed based on 2.5 months of payroll and a minimum of 80% of funds must be used on payroll to be eligible for forgiveness. In addition, PPP funds are not taxed as income and you can continue to make deductions for PPP-covered payroll. ERC tax credits, however, are credits (or refunds) for a percentage of payroll in each quarter for which you qualify. There are specific rules for determining eligibility by quarter and limiting the dollars that can be claimed for each employee.

Initially, with the CARES Act, employers could choose to apply for PPPs or claim ERC credits, but not both. The PPP was more beneficial than the ERC for most businesses (for reasons we won’t discuss here), so most businesses with fewer than 500 employees applied for and received forgivable PPP Loans. This is not like that. If you maintained 500 or fewer employees during the pandemic and meet the criteria, you can now apply for ERC regardless of whether or not you previously applied for PPP Loans.

On March 11, 2021, the American Bailout Act of 2021 was signed into law, which included many modifications and expansions of existing elements of previous stimulus programs.

Modifications worth noting for employers include:

Businesses that applied for and received PPP funds could now also claim ERC credits.

ERC credits could be applied for retroactively for companies that qualified in 2020.

ERC credits extended through 9/30/21 with lower qualification requirements.

The per employee limit on qualifying wages increased from $10,000 for all of 2020 to $10,000 per quarter for the first 3 quarters of 2021.

The amount of the refundable credit went from 50% of eligible wages in 2020 to 70% in 2021.

So the short answer is “Yes”… you can claim ERC even if you received PPP funds.

Unlike the Payroll Protection Program (administered by the Small Business Administration), there is actually no “application process” for Employee Retention Tax Credits. You just need to apply for the ERC tax credit as you would any other tax credit, telling the IRS that you can legally apply for the credit. When you claim a child tax credit, you do so by stating this fact on your Form 1040 Personal Income Tax Return. The difference is that when you claim an ERC tax credit, you do so on your Entrepreneur’s Quarterly Tax Return Form 941. For prior quarters, you must file an amended form (Form 941-X) to reduce the tax liability for the current quarter and request a refund of excess credits (which is very likely). Another advantage of ERC is that because you can often calculate these credits before distributing cash for payroll, you can file a Form 7200 to receive a cash advance and avoid waiting until the end of the quarter to request a refund.

Even if your income appears to be back to normal, there are a few things to consider before passing this ERC assessment. First, even if income is back to “normal” in 2021, you may have qualified in 2020 and can retroactively claim those credits. That eligibility criteria in 2020 was based on decreased revenue from 2019, or if your business was closed in whole or in part due to a government mandate. Second, while your revenue may be back to “normal” in the first quarter of 2021, remember that we are comparing your first quarter of 2021 to the first quarter of 2019. If 2019 was a year of growth for your business, then your income levels 2 years ago may have been much lower than in Q1 2020. And lastly, if your income decreased in Q4 2020 by only 20% compared to Q4 2019, then you may as well be eligible for the first quarter of 2021. There is a safe harbor provision that few advisors are talking about, and it means that many companies are qualifying for $7,000 per employee in Q1 2021. I know, it seems too good to be true, But the government wants to incentivize and reward you for keeping American residents employed and money flowing through our economy as we rebuild ourselves bigger and stronger than ever.

Most likely, he is referring to a provision in the CARES Act that allowed businesses to defer depositing and paying the employer portion of Social Security taxes. These deferrals must be repaid later, with at least 50% of the balance due by 12/31/21 and the remaining balance by 12/31/22. ERC credits are NOT a deferral. They are dollar-for-dollar credits against the wages you have paid. It’s not about taxes, it’s about real wages. These credits can offset future tax contributions or you can receive a refund check – it’s your choice. And you will NOT have to repay these funds (unless, of course, you fail to provide proper documentation in the course of an audit).

Your banker, CPA, or financial advisor was probably very helpful in getting your PPP funds because they were, in effect, signing you up for an SBA-guaranteed loan. The SBA paid banks administrative fees based on the PPP loans they made, so they were incentivized to tell you about the program and get all the paperwork in order. Compared to ERC, the PPP program was also a pretty straightforward calculation. Two and a half times your median monthly payroll, including health insurance and state unemployment taxes. From the conversations we’ve had with bankers, they have no interest in getting involved in meeting your employment tax obligations. For them it is a responsibility and it is outside their scope of services.

Your Payroll Service does an excellent job of running the fundamentals of paying your employees, paying your employment taxes, and submitting your quarterly reports. However, calculating your ERC credits requires visibility into your income statement and PPP forgiveness applications. Not only that, but the complex requirements around eligibility and allocation of ERC credits at the employee level, while accounting for qualifying annual and quarterly wage gaps and… well, you can probably tell why Services de Nomina does not offer to do all of this for you. The payroll services we have worked with so far are happy to provide us with the payroll records we need to make assignments. And they are happy to submit the amended Form 941-X to the IRS on behalf of our client. But that’s all. In fact, most sensible Payroll Services ask their clients to sign a waiver of indemnity before filing Form 941-X, because the Payroll Service cannot be responsible for the accuracy of the ERC credits you claim. For them to get involved in the intricacies of this calculation is a responsibility and is beyond their scope of services.

Whether your tax advisor is a CPA or an EA, they will most likely only prepare your federal and state income tax returns. However, ERC credits are claimed against employment taxes on form 941, and cash advanced via form 7200. The complexity of the ERC program is a beast unto itself and every tax accountant with The ones we’ve talked to have said they’re focused on keeping up with the ever-evolving income tax code, and now they can’t become experts on the ERC program as well. If your tax accountant is comfortable determining your eligibility by quarter and year, calculating your credits, and preparing contemporaneous documentation to support an IRS audit, then you should certainly let them handle all of this. If you’d like a second set of eyes on this, we’d be happy to take a look.

Your accountant should have access to all the information necessary to accurately calculate your ERC legal claim. You’ll have your financial reports, payroll records, and PPP loan forgiveness documents. The million dollar question is… Do you have time? Do you have time to dig into the text of the American Bailout Act of 2021 AND its accompanying reference laws such as: CARES Act, Families First Act, Payroll & Healthcare Enhancement Act, PPP Payroll Flexibility Act and the Consolidated Appropriations Act. Is it time to read the IRS Interpretations and FAQs? And cross those definitions with PPP, which was defined separately and interpreted differently in the Small Business Administration Bulletins and IFRs? Do they have time to ensure accuracy in determining eligibility, maximize your computation, and create the supporting documentation you’ll need to support an IRS audit of employer taxes? Until now, we have not found an accountant who is capable of assuming all this, while dealing with day-to-day accounting. If yours can, then take him up on his offer. We will be happy to take a second look at it.