How many times have you heard about the Employee Retention Credit (ERC) in the past year? Probably a lot! So, what’s new under the sun? Quite a bit, actually.

On November 15th, President Biden signed the Infrastructure Investment and Jobs Act into law, which the Senate passed this past August. Previously, the ERC was set to expire on January 1, 2022. However, the new Act repealed the ERC for the fourth quarter of 2021. This opportunity won’t last forever. You can claim the 2020 until April 15, 2024, and the 2021 until April 15, 2025.

A lot has happened since its introduction in early 2020, and confusion still surrounds the credit. Here are some frequently asked questions to help clarify what you need to know — without boring you to death in the process.

The Employee Retention Credit: What to know

The Employee Retention Credit (ERC) is a valuable financial relief measure designed to support businesses impacted by the COVID-19 pandemic. It offers a tax credit to eligible employers who kept their employees on the payroll during the challenging times of the pandemic. Understanding the eligibility criteria, the calculation of the credit, and the application process can significantly benefit businesses by reducing their payroll tax liability.

For employers or business owners, the ERC not only provides immediate financial relief but also incentivizes the retention of valuable staff, ultimately contributing to long-term business stability.

What qualifies you for Employee Retention Credit?

Qualifying for the Employee Retention Credit (ERC) hinges on two main criteria. First, businesses must have experienced a significant decline in gross receipts, generally defined as a 50% drop compared to the same quarter of the prior year. Alternatively, eligibility is met if the business faced full or partial suspension of operations due to government orders related to COVID-19.

It’s essential to assess these conditions accurately, as meeting either criterion opens the door to substantial tax credits aimed at easing payroll burdens and encouraging workforce stability.

Employee Retention Credit application requirements

Applying for the Employee Retention Credit (ERC) involves meeting specific documentation and procedural requirements. Employers need to provide evidence of their eligibility, such as proof of significant decline in revenue or government-mandated suspension of operation.

• Eligibility evidence: Proof of significant revenue decline or government-mandated operational suspensions.
• Payroll records: Detailed records showcasing employee wages paid during qualifying periods.
• IRS forms: Completion of necessary forms, primarily Form 941, to claim the credit.
• Accurate documentation: Ensures a smooth application process and maximizes benefits from the credit.

How to claim the Employee Retention Credit

Claiming the Employee Retention Credit (ERC) is straightforward. Employers must report their total qualified wages and the related health insurance costs for each calendar quarter on their quarterly returns on employment taxes, using IRS Form 941.

Additionally, businesses can opt to receive an advance payment by submitting Form 7200 if they expect the credit to exceed their payroll tax liability. Keeping detailed records of eligibility and wages is crucial for a smooth and successful claim process.

Common mistakes to avoid when claiming the ERC credit

• Inaccurate documentation: Failing to maintain detailed records of eligible wages and health insurance costs can lead to issues during an IRS review.
• Misinterpreting eligibility: Ensure you correctly assess significant revenue decline or government-mandated operational suspensions to meet eligibility criteria.
• Overlooking amendments: Remember that filing for the ERC might require you to amend previous Form 941 returns and potentially your income tax return.
• Neglecting deadlines: Be aware of the filing deadlines for Form 941 and Form 941-X to avoid penalties or missed opportunities for credits.
• Insufficient communication with payroll providers: Coordinate with your payroll provider to ensure all necessary forms are accurately completed and submitted.
• Ignoring professional advice: Consider consulting with a tax professional to navigate the complexities of the ERC and ensure compliance with all IRS regulations.

 What are the eligible businesses?

Eligible businesses for the Employee Retention Credit (ERC) include those that experienced a substantial decline in gross receipts or were subject to full or partial suspension of business operations due to government orders related to COVID-19. Specifically, a significant decline is defined as a 50% drop in gross receipts compared to the same quarter in the prior year.

Additionally, businesses of all sizes, including non-profits, can qualify, though the credit is particularly beneficial for small to mid-sized enterprises. It’s essential for businesses to assess their financial records and operational status accurately to determine their eligibility and ensure compliance with the ERC requirements.

Full-time employees vs. contractors

When considering the Employee Retention Credit (ERC), it’s important to understand the distinction between full-time employees and contractors. The ERC specifically applies to wages paid to full-time employees, as defined by the IRS, typically those working 30 hours or more per week. Contractors, however, do not qualify for the ERC since they are not considered employees under tax law.

This means businesses cannot claim credit for payments made to independent contractors, only for the wages and qualified health plan expenses of their full-time staff.

Is Your Healthcare Practice Eligible for the Employee Retention Credit?

Determining eligibility for the Employee Retention Credit (ERC) in your healthcare practice is essential for financial relief. If your practice experienced a significant drop in revenue or faced a full or partial shutdown by a governmental authority due to COVID-19, you likely qualify. By keeping detailed records of these impacts and the wages paid, you can unlock valuable tax credits, easing payroll costs and helping maintain staff levels during challenging times.

Do you qualify? What are your next steps?

If you’ve read this far and think you might be eligible for a credit or refund for the past year or quarters, start by reviewing your quarter-by-quarter profit and loss statements. Look for any drop we can help with that calculation.

Next, contact your payroll provider. You may need to file amended Form 941 reports to claim your IRS refund. After amending, allow time for the IRS to process these returns and send your refund. Be prepared for delays, as the IRS is currently operating very slowly.

Remember, amending Form 941s for prior years and claiming the refund will also require you to amend your income tax return. Since the amount claimed on your payroll tax forms is less now than when you first filed them, the tax write-off will be smaller. This change needs to be reflected in an amended business tax return.

Can I file the ERC myself?

Yes, you can file the Employee Retention Credit (ERC) yourself, but it requires a thorough understanding of the eligibility criteria and detailed documentation. You need to accurately complete IRS Form 941 or Form 941-X for amended returns, ensuring all qualifying wages and health insurance costs are properly reported.

While it’s possible to handle this on your own, many businesses find it beneficial to work with a professional tax preparer, accountant, or payroll service to navigate the complex requirements and maximize their credit. This professional assistance can help avoid errors and ensure compliance with IRS regulations.

Accounting for the Employee Retention tax credit

Accounting for the Employee Retention Tax Credit (ERTC) with Leichter Accounting Services ensures precise and compliant financial reporting. Our team meticulously tracks eligible wages and health insurance costs, keeping them separate from regular payroll expenses.

This thorough approach guarantees compliance with IRS guidelines, maximizes your credit benefits, and simplifies the audit process, supporting your business’s financial health and stability with expert precision.

We’re here to help.

Leichter Accounting Services is an experienced CPA firm with a passion for accounting and dedication to our clients. We devote our energy to ensuring you have a solid financial foundation for growth. We offer a range of accounting and financial services, including bookkeeping, financial reporting, tax preparation, and more.