Welcome to “How to Take Advantage of the Employee Retention Tax Credit”
If you’re looking to take advantage of tax credits and deductions, then don’t skip out on the Employee Retention Tax Credit. This article will talk about how you can take advantage of it.
What is employee retention tax credit?
To help companies impacted by the COVID-19 epidemic, the CARES Act established the employee retention credit (ERC). In December 2020, the Consolidated Appropriations Act added to and changed the ERC.
The Infrastructure Act, which Congress finished on November 5, 2021, advanced the ERC’s expiry date for the majority of employers from December 31, 2021, to September 30, 2021. Businesses still have the option to retrospectively claim the ERC for earlier calendar quarters.
The Employee Retention Credit (ERC), which was initially applicable to “qualified wages” paid to retained workers from March 13, 2020, through December 31, 2020, was a refundable payroll tax credit. The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act was responsible for its creation.
The ERC’s goal was to persuade companies to retain workers on the payroll even if they were unable to work throughout the covered time as a result of the coronavirus epidemic. The original ERC underwent several modifications. As of September 30, 2021, it was finally retroactively stopped, with the exception of starting recovery enterprises as specified by the Infrastructure Investment and Jobs Act (IIJA).
How Does It Work?
The employer’s portion of social security taxes may be offset by the employee retention credit. The credit is entirely refundable, though. Accordingly, any calendar quarter when the credit exceeds the employer’s entire Social Security obligation results in an overpayment that must be returned to the employer.
The IRS FAQs allow a company to obtain these money prior to the quarter’s conclusion by dollar-for-dollar offsetting payroll taxes payable (including taxes withheld from employees). If these credits still result in a return that is greater than the employer’s total payroll taxes, the IRS has also created an accelerated refund procedure.
By submitting Form 7200, employers can immediately benefit from the advance payments and claim the credits in excess of the payroll taxes. The FFCRA paid leave credit is promptly refunded using the same form that is used for that purpose.
Do not forget that the same employer may claim both credits, but not on the same pay. The least amount that can be sought on Form 7200 for the department to process is $25, according to current IRS advice.
When evaluating whether aggregated employer groupings are eligible for the credit, they are considered as a single employer; nevertheless, once they are, each organization is required to independently claim and reconcile the credit. The eligible salaries ceilings will need to be distributed among the businesses by the combined organization, nevertheless.
What now?
Employers can begin to assess how they obtain all the data required to identify the credits for which they are eligible while we wait for official advice on the credits and a finished 941 to reconcile them. To identify which government financing source is best for their specific situation, they should also think about comparing it to other options, such as the PPP loan.
Keep in mind that irrespective of how much of a PPP loan is forgiven, if you or any member of your aggregate group got one, you will not be eligible for a retention credit.
Latest Updates
Since the ERC was first passed in 2020, taxpayers have questioned what effect further COVID-19 relief may have on a company’s gross revenue. Employers might become eligible for the ERC in a number of ways. According to one technique, an employer’s “substantial drop in gross earnings” between the quarter for which qualifying is sought and the same quarter in 2019 must have occurred.
Taxpayers weren’t sure whether government-provided COVID-19 relief amounts, such as loan forgiveness under the Payroll Protection Program (PPP), grants to operators of shuttered venues, and grants for restaurant revitalization, should be included in “gross receipts” when determining a “significant decline” until the IRS issued this guidance.
For the sole purpose of establishing ERC eligibility, the IRS established a unique safe-harbor rule in Revenue Procedure 2021-33 that permits taxpayers to deduct money received through the COVID-19 relief programs mentioned above from the computation of “gross receipts.”
According to the safe harbor, the sums are nevertheless considered gross revenues for all other tax reasons. The advice suggests that grants or debt forgiveness from any other program will continue to count as gross revenues for the ERC because it makes no mention of any COVID-19 relief schemes.
IRS Notice 2021-49 provided clarification on a number of additional issues that have raised doubt for taxpayers wishing to submit an ERC claim. The letter reaffirmed that businesses could claim both an ERC and a FICA tip credit for the same gratuities and that tips given to employees considered as “qualified earnings” for credit amount calculations.
Income Tax Impact
The announcement also resolves a scheduling concern regarding the ERC’s salary expenditure adjustments. Wages utilized in the ERC computation cannot be deducted by employers from taxable income up to the ERC level.
According to the new guidelines, an employer that withheld payments that served as the foundation for an ERC claim must adjust income in the year in which the wages were received, not in the year in which the law was passed or the refund claim was submitted.
Therefore, even if a refund claim is submitted in 2021 or later, if an employer submits an ERC refund claim for a quarter in 2020, the adjustment to taxable income equal to the ERC must also be included on the employer’s 2020 federal income tax return.
Owner Wages
For salaries given to persons who control more than 50% of a firm, the new guideline is less favorable. In general, no one can be a member of the ERC if they are connected to a greater than 50% owner by blood or marriage.
When deciding who constitutes a more-than-fifty percent owner, constructive ownership requirements also apply. Unless the constructive ownership restrictions are examined extensively, the regulations do not explicitly disqualify the owner from the ERC.
This is exactly what the notification stated, concluding that if the owner has a live brother, spouse, ancestor, or lineal descendant – they cannot be included in the ERC.
The reason for this is due to the legal owner will be connected to the surviving family member who would effectively own more than 50% of the firm. As a result, earnings given to members of the owner’s family who control more than 50% of the company are often excluded from the ERC computation.
Guidance for Q3 and Q4
Additionally, the notification details two potential areas of growth for the ERC in the third and fourth quarters of 2021. The ERC is available to “recovery beginning firms”. “Severely distressed employers” are also permitted to increase the number of earnings included in the ERC calculation.
Recovery startup companies are those who started up after February 15, 2020 and had yearly gross receipts of less than $1 million. They compute the ERC using the same definition of “qualified earnings” that other eligible employers do if they satisfy the legal requirements. The ERC is capped to $50,000 per three months for startup companies.
According to Notice 2021-49, some companies might become “severely distressed employers” in the third and fourth quarters of 2021 if their gross receipts fall by 90% from 2019.
The notice outlines a procedure for these firms to follow in order to classify all salaries received to employees during that quarter as “qualified earnings” for the purposes of determining the ERC. It also gives examples of enterprises that meet the criteria for being classified as severely distressed.
If you want to Take Advantage of the Employee Retention Tax Credit, reach out to Spped Financial Group today! We are happy to answer any and all questions you have about the ERC and file your small business taxes for 2023 as well.
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Also read “Small Business Tax Laws: How to Adjust Your Accounting to Stay Compliant“
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