Business and Finance

How to Obtain the Employee Retention Tax Credit (ERTC) Under the Second Round of Covid Relief (Updated)


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Last Updated on February 10 at 6 p.m.

For the common small- proprietor, it’s arduous sufficient to perceive how to get a chunk of the latest round of Paycheck Protection Program (PPP) money, not to mention how to entry the Employee Retention Tax Credit (ERTC or “Credit”).

In truth, below the CARES Act (the first spherical of aid signed into regulation in March of final yr), employers have been not allowed to acquire each a PPP mortgage and declare the Credit. Thus, most small-business house owners gave up on even studying about or contemplating the ERTC.

However, below this second spherical of general coronavirus help, enterprise house owners are ready to get help from BOTH provisions. Yes, you’ll be able to faucet into the PPP and declare the ERTC!

Thus, the ERTC is a crucial provision in the large 5,500-plus-page Consolidated Appropriations Act of 2020 for small-business house owners to perceive and presumably make the most of.

Which firms qualify?

  • Any sole proprietor, restricted legal responsibility firm (LLC), S-Corporation or C-Corporation is eligible, if they meet the further standards to qualify.
  • Any firm with lower than 500 workers (Full-Time Equivalent workers, FTE) as of December 2020 could take part in the program and apply for the ERTC. (Previously, solely enterprise house owners with much less 100 workers may take part.)
  • In order to declare the Credit, a enterprise will need to have skilled a decline in gross receipts by greater than 20% in any quarter of 2020, in contrast to the identical quarter in 2019.

Related: New Stimulus Bill Includes Second Round of PPP Loans for Small Business and Forgiveness Rule Changes Favorable to Borrowers

The following Diagram illustrates the 5 steps to evaluate and calculate in case you qualify:1612199321 ERTCDiagram1


 

How a lot is the Credit?

  • The credit score is 70% of Qualified Wages for the allowed quantity, per quarter, paid between January 1, 2021 and earlier than July 1, 2021.
  • Each worker’s allowable wage quantity is $10,000 per quarter in 2021, excluding any proprietor and their member of the family’s with mixed possession in the firm of 50% or extra (extra on this beneath).
  • So, the most any employer could obtain as a credit score per un-related worker in 2021 is $14,000 ($7,000 per quarter). (This doesn’t take note of coordinating this credit score with PPP. More on that beneath.)
  • But additionally, don’t neglect about certified wages paid between March 13 and Dec 31, 2020! The credit score is 50% of certified wages paid throughout this era, however solely up to $10,000 per worker of annual wages paid (extra on this beneath, together with the guidelines concerning house owners and their relations’ payroll quantities).
  • Thus, the most any employer could obtain as a credit score per worker in 2020 is $5,000. (More beneath on the risk of going again and getting the credit score for 2020.)

Example: XYZ Enterprises, LLC (taxed as an S-Corporation) plans to have two full-time workers in 2021 that may every be paid $9,180 ($18 an hour) throughout first and second quarter of 2021, together with three part-time workers in the first quarter and 5 part-time workers in the second quarter that may every be paid $3,060 ($12 an hour) 1 / 4. The Corp can pay health-insurance premiums for the two full-time workers, pre-tax, of $500 per 30 days, or $3,000 per quarter for each of them mixed. Thus, whole Qualifying Wages of the workers and the calculation for the ERTC is about forth beneath in Table 1 as follows:

1612199340 ERTCTable1

* More beneath on how this quantity works along side the PPP, and if an employer can return to 2020.

What payroll is taken into account Qualifying Wages for the ERTC?

Qualifying Wages is a crucial time period to perceive, as well as to what it consists of when calculating the ERTC. It’s extra than simply gross pay. First, Qualifying Wages consists of each full-time and part-time workers’ payroll quantities.

Next, you might be allowed to add any certified well being plan bills/premiums you paid on behalf of the worker to this determine. This usually consists of each the portion of the health-insurance price paid by the employer and the portion of the price paid by the worker with pre-tax salary-reduction contributions.

However, the certified well being plan bills don’t embrace quantities that the worker paid for with after-tax contributions. More here at the IRS web site on how to decide and calculate Qualifying Wages.

Can you the Owner get the Credit on your private payroll or revenue?

This is the golden query, isn’t it? Regrettably, the reply is considerably in a grey space. All we all know concerning this specific element comes from the IRS.gov Newsroom and the FAQ section regarding the ERTC.  

For sole proprietors, the reply is not any. The IRS in FAQ #23 makes it clear that they don’t seem to be going to permit the ERTC for sole proprietors below their interpretation of the CARES Act. They additionally clearly state that the FAQ part has not been up to date below the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020. Most professionals agree that the new laws doesn’t change the rule for sole proprietors.

However, FAQ #23 doesn’t tackle firms, or extra particularly, S-Corporation house owners. In truth, FAQ #59 states that S-Corporations are allowed to take the ERTC for his or her workers (assuming the enterprise proprietor complies with all the different guidelines, together with not claiming payroll for the ERTC that was lined with PPP cash).


FAQ #59 additional states that payroll for “related individuals” of the S-Corporation house owners can’t be used for calculating the ERTC. However, it conspicuously doesn’t state that the “owner” is taken into account a associated particular person.

So, when it comes to the motion house owners of S-Corporations holding 50% or extra of the inventory, the secure guess is to contemplate them a “related individual,” and thus the proprietor can’t obtain the ERTC on their very own payroll. This cautious interpretation would fall in step with different guidelines in the code concerning self-dealing or prohibited transactions (i.e. Section 1372 of the Internal Revenue Code requires that 2% or higher shareholders be handled as companions in a partnership for this function, making them self-employed people as an alternative of workers).

Thus, for functions of this text and the recommendation we’re giving our purchasers, till we see definitive steering and a stance from the IRC on the problem of payroll for house owners of an S-Corporation proudly owning 50% or extra of the entity, we’d not declare the ERTC on their wages.

But what we do know, in accordance to IRS FAQ #59, any and all payroll for a “related individual” can’t be utilized in figuring out the allowable ERTC in 2020 or 2021. These people embrace any of the following with a relationship to an proprietor of the firm who owns 50% or extra in worth of the excellent inventory:

  • A baby or a descendant of a toddler;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mom, or an ancestor of both;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law or sister-in-law.

In abstract, in case you aren’t using a third-party unrelated to you personally, it could be advisable not to attempt to declare the ERTC, even in case you meet all of the different {qualifications}.

What occurs if my firm had a restoration later in 2020 or 2021?

Finally, bear in mind that if your organization really had a big enterprise restoration earlier than the finish of the 2020 or has one in 2021, your eligibility for the ERTC could finish.

Under the new Covid regulation, a enterprise proprietor is not allowed to take the ERTC in the quarter instantly following 1 / 4 the place their quarter gross receipts exceed 80% in contrast to the identical calendar quarter the yr earlier than.

For instance: If a enterprise has a 2020 second quarter the place income is down 33% in contrast to the identical quarter in 2019, the enterprise qualifies for the ERTC in first and second quarter of 2020 and would proceed to qualify for the relaxation of the yr. However, in fourth quarter, income in the enterprise is up by 82% in contrast to the identical quarter in 2019. At this level, the firm not qualifies for the ERTC in fourth quarter 2020. In truth, the firm solely qualifies up to the level the place gross sales elevated above the 80% threshold and is proscribed to claiming the ERTC for certified wages in first, second and third quarter 2020. See the following illustration Diagram 3.

1612199358 ERTCDiagram2

Additionally, this identical rule applies into the first and second quarter of 2021. Thus, you probably have a dramatic upturn in gross sales (80% rule) in second quarter 2021 in contrast to second quarter 2020, then your eligibility for the ERTC would finish with first quarter 2021.

How does the ERTC work with PPP?

The excellent news is (and it’s significan), below the new laws, enterprise house owners are entitled to each the first and second spherical of PPP and the ERTC. However, PPP funds and ERTC can’t be used to cowl the identical payroll prices. But all shouldn’t be misplaced; it simply will get difficult.


If a enterprise proprietor plans rigorously and does good document protecting and accounting, they need to find a way to maximize the advantages of each PPP and ERTC, creating hundreds of {dollars} in tax-free cash!

First, let’s assume a enterprise proprietor qualifies for the second spherical of PPP below the new 25%-reduction-in-sales rule. 

Next, since the threshold to qualify for the ERTC is decrease than that of the PPP (a 20% rule), it’s then apparent the enterprise proprietor would thus qualify for each.

NOTE: Stated in any other case, if a enterprise proprietor qualifies for PPP below the gross sales comparability check, then they mechanically qualify for the ERTC. They additionally want to then “coordinate” the two advantages in taking benefit of them each to the best extent potential.

In order to exploit each advantages, it’s necessary the enterprise proprietor take note of the following factors after which a three-step technique:

  • The software deadline for the newest spherical of PPP is March 31, 2021. (It would possibly behoove a enterprise proprietor to delay making use of for PPP up till the deadline so as to maximize their ERTC profit.)
  • Remember, 40% of PPP monies can be utilized for gadgets aside from payroll, equivalent to mortgage curiosity, hire, utilities, employee safety prices associated to Covid-19, uninsured property injury prices attributable to looting or vandalism throughout 2020 and sure provider prices and bills for operations. (Thus, it’s crucial to use not more than the 60% of PPP cash for payroll since these payroll {dollars} can’t be used for the ERTC).
  • Next, PPP cash should be spent on payroll and certified bills over 24 weeks from the day the disbursement is acquired. This is referred to as the ‘”Covered Period.” (A business owner will more than likely want to use every week of this period rather than spend the PPP money quickly, in order to get the most out of the ERTC.)  
  • Finally, keep in mind that the ERTC is up to 70% of $10,000 of qualified wages paid to each employee in each of first and second quarter 2021 only — not in third or fourth quarter. (However, PPP money can be spent in third and fourth quarter because of the 24-week period.)

Strategy:

  1. The business owner should only used 60% of their PPP funds for payroll (if possible) and the rest on qualified expenses.
  2. Next, they should spread out the PPP money used for payroll as long as possible (within the 24-week period), and if they haven’t already utilized for the PPP, possibly wait till the finish of March, however not miss the software deadline.
  3. Then, the enterprise proprietor ought to max out the ERTC credit score in the first and second quarter with payroll bills not used with PPP cash.

Here is an instance to illustrate how this technique may doubtlessly be used.

For instance: Assume a enterprise proprietor (not in the lodging or meals service business) qualifies for each the second spherical of PPP and the ERTC. They obtain $80,000 in PPP funds on February 1, 2021. Presumably, since they acquired $80,000 in PPP funds, their common month-to-month payroll would have been $32,000 ($80,000/2.5). Their 24-week Covered Period would additionally then be from February 1–July 19, 2021. Further, we would like to assume that the enterprise proprietor has the potential to spend 40% of their PPP cash on different bills than payroll. This would require that solely $48,000 (of the $80,000) have to be spent on payroll over the 24-week interval. Thus, the enterprise wants to spend roughly $8,000 a month on payroll out of the PPP cash over that interval. If it will probably meet this minimal, then the complete PPP mortgage ought to be forgiven. Finally, we want to know the quantity of workers and their anticipated payroll over the time interval they’re eligible for the ERTC and wish to spend the PPP cash. See the desk of workers beneath (Table #2) and the diagram of allocating payroll throughout the time intervals (Diagram #3).  

1612199377 ERTCTable2

1612199398 ERTCDiagram3

I feel it’s necessary to acknowledge that putting any PPP monies acquired right into a separate checking account and punctiliously monitoring what bills they’re used for is completely crucial to staying out of scorching water in a possible audit.

Also, one final nuance to bear in mind when coordinating the payroll bills for PPP and the ERTC: Qualified Wages embrace payroll prices for group health-care advantages paid pre-tax by workers, equivalent to the worker share of their health-care premium. Moreover, ERTC tips don’t prohibit together with in Qualified Wages bills accelerated for group well being advantages paid in first or second quarter. These are completely different guidelines in contrast to the PPP program and wish to be taken into consideration when calculating which payroll prices for the ERTC and which of them are paid for with PPP cash.


Can a enterprise proprietor return and declare the ERTC for 2020 in the event that they didn’t already accomplish that?

Yes. However, the enterprise proprietor wants to meet one of the two checks set forth beforehand in the CARES Act so as to qualify for the ERTC in 2020 (NOT the new “20% reduction in sales rule” hat solely applies for the 2021 credit score). 

Under Section 2301(c)2 of the CARES Act, a enterprise proprietor qualifies for the ERTC in 2020 if the enterprise meets both one of the following two checks:  

  1. You are eligible for this credit score if a government order absolutely or partially suspended your operations throughout a calendar quarter due to Covid-19 (you’ve gotten a excessive probability that you simply expertise this in what you are promoting in 2020); or
  2. Your gross receipts for a calendar quarter in 2020 are proven to be 50% lower than the gross receipts from the identical quarter in the yr 2019.

Of course, the 50% discount in gross sales check is definitely extra onerous and should scare some enterprise house owners off, inflicting them not even attempt to apply for the credit score. However, I feel most companies will probably be ready to meet Part 1 of the check and make the 50% check irrelevant. A cheap interpretation of that statute would imply that even “1 DAY” of a required authorities shut down of what you are promoting in 2020 would permit what you are promoting to qualify for the ERTC in 2020. 

Now another factor to keep in mind: The ERTC is value a completely different quantity in 2020, and that of the first two quarters of in 2021.  

For wages paid after March 12, 2020, and earlier than January 1, 2021, the ERTC will be utilized to 50% of qualifying wages up to $10,000 of annual wages. This means a most of $5,000 per worker for the complete yr of 2020 (not per quarter), could possibly be credited again to your organization if it qualifies.

How do I obtain this credit score?

Let me first begin by stating what you don’t do to get this credit score:

  • You don’t apply by means of your financial institution.
  • It has nothing to do together with your PPP software course of.
  • You don’t apply by means of the (SBA).
  • You don’t even ship the IRS a particular software for the ERTC (until requesting an advance).

The ERTC is a refundable tax credit score that’s sometimes claimed when eligible employers report their whole certified wages for functions of the ERTC for every calendar quarter on their federal tax returns (Form 941: Employer’s Quarterly Federal Tax Return).

However, employers that need to scale back their payroll deposits in anticipation of receiving the credit score, or need to obtain a cost upfront from the IRS, could submit a Form 7200. This means doubtlessly having the potential to get the tax credit score again early in the type of a test from the IRS.

The IRS has a devoted internet web page, “How to claim the Employee Retention Credit FAQs,” explaining how and when to file sure varieties. Nonetheless, it’s advisable you converse together with your tax advisor or payroll firm to ensure you coordinate the software and , particularly in case you additionally plan on using PPP funds.

Presumably, if a enterprise goes to return and declare the ERTC for 2020, it could want to first decide which payroll was paid for with PPP funds after which calculate which qualifying wages could be eligible.

Next, the enterprise proprietor would return and amend the acceptable quarterly Form 941s for 2020 and declare the credit score. However, the IRS has not given particular steering on this process.

Related: The IRS Increases 2021 Contribution Limits to SEP IRAs and Solo 401(k)s for Business Owners

In abstract, the ERTC is a chance for enterprise house owners with W-2 wages for workers to acquire some important assist from the authorities. A enterprise proprietor ought to rigorously decide in the event that they qualify and hunt down skilled steering from their tax return preparer and/or payroll firm to be sure that the correct varieties are filed. Be cautious to not depart any cash on the desk below this new laws in case you can assist it. Get concerned in the course of. You are the captain of your ship!

Mark J. Kohler is a CPA, Attorney, co-host of the Podcast MainStreet Business and creator of the The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions, 2nd Edition, and  The Business Owner’s Guide to Financial Freedom: What Wall Street isn’t Telling You. He can be a associate at the regulation agency Kyler Kohler Ostermiller & Sorensen, LLP and the accounting agency K&E CPAs, LLP. 

 

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