The Truth About ERTC Eligibility
Many people have called the Employee Retention Tax Credit a "once in a lifetime" tax credit for businesses.
With funding as high as $21,000 per employee, that does not need to be paid back, your business could survive this once in a lifetime world event.
It's important business owners, no matter how small, look into ERTC qualifications to see if they’re eligible. Way too many businesses think they are not eligible for ERTC funds. Why? Because of the confusion, misunderstanding, and misinformation floating around.
We're here to debunk some of the myths commonly surrounding this crucial small business lifeline. And give you the truth about ERTC eligibility.
Many businesses are surprised to find out they qualify, and that it's not too late to claim the funds.
First, What is the ERTC?
The Employee retention tax credit (or ERTC, ERC, or Employee retention credit) is a program created by the CARES (Coronavirus Aid, Relief and Economic Security) act.
This act was signed into law in early 2020. A few other acts, such as the CAA and ARPA made changes to the availability and eligibility of employee retention credits.
The other well-known program businesses are familiar with is the PPP, or paycheck protection program.
The amendments that have happened in the past few years have meant eligible employers can benefit from both of these government relief funds. There have also been changes to how much you can claim for each employee. There's now different amounts for wage paid in 2020 vs 2021.
The ERTC Doesn't Have to be Confusing
You can see where much of the confusion about ERTC comes from. Many businesses, especially small ones, do not have the resources for getting clear and quick updates on relief programs they can benefit from. [Pioneer Accounting Group aims to change that]
Here are the biggest misconceptions we hear about the ERTC. These are myths that have prevented many from claiming business-saving funds. Don't let it happen to you.
Claim #1: You can't get the ERTC and PPP.
Fact: You can qualify for and receive both the employee retention tax credit and PPP funds. The fact is that you cannot use the same employee wages to qualify for both programs.
Qualified wages used when applying for PPP forgiveness are not eligible for ERTC, so make sure you are not "double dipping."
That being said, we've found that PPP funds typically run out for our clients about 10-15 weeks after they're received. That's when the ERTC can kick in.
So, while qualified wages paid that were used for forgiveness wouldn't be used for the ERTC, that still leaves a very large chunk of payroll that does qualify!
Claim #2: Our profit drop didn't hit the minimum requirement to qualify.
Fact: The employee retention credit's qualification is not profit-driven. It is revenue-driven. If a business meets the revenue drop qualification, then it qualifies regardless of what happened to profits.
Check your gross receipts for each quarter of 2020 and 2021. If there's a decline of more than 50% compared to the last year's same quarter, you may qualify.
Another way to qualify is if you started a new business after February 15, 2020, which would make you a recovery startup business.
Claim #3: Our revenue dropped, but not dramatically enough to qualify.
Fact: The alternative method for qualifying under the employee retention tax credit is whether your business was impacted by government mandated restrictions.
So, did you have to adjust your hours of operation? Occupancy limits? Contact tracing orders? Supply chain issues? These are items you'd want to figure out to see if you qualify on the alternative basis.
Tips for ERTC eligibility:
Document everything and keep it organized and accessible. You'll want to have documentation of eligibility support and proof, certifications, PPP paperwork, and reports of how payroll expenses fit in with PPP and ERTC.
Ask for help from a trusted financial advisor. With shifting deadlines and requirements, and the differences between ERTC and PPP, it can be tricky to maximize your funds and get what you qualify for.
Get help from a professional experienced with these programs who can answer your questions and help you file.
The simplest way to apply and get approved?
Call, text, email, put a note on a messenger pigeon, whatever - get a hold of us for a free consultation! Better yet, consider partnering with Pioneer Accounting Group for all your accounting needs and be at the very front of recovery programs such as this!
We prefer money to be in your wallet, not left on the table.
Frequently Asked Questions About ERTC
1) Is ERTC considered taxable income?
A: The employee retention tax credit reduces the amount of wage expense by crediting a portion of qualified employee compensation. It does not increase revenue, but it does decrease expenses, which means it increases your company's taxable profits.
2) When does the ERTC expire?
A: The statute of limitations to amend payroll tax forms is generally three years. Since the first calendar quarter that the ERTC applies towards is calendar quarter 2 2020, that means that you have until calendar quarter 2 2023 to amend those tax forms to claim the tax credit.
3) I accidentally did not file my original 941s, can I claim ERTC on these original forms?
A: Originally, there were three ways to claim the tax credit - you could take an advance in the form of a form 7200 when you were still in the qualifying calendar quarter; you could take it on an original 941 after the same calendar quarter ends when you've calculated the credit amount; and lastly you could amend the 941 and claim the tax credit on the 941X.
Since we are long past the qualifying calendar quarters, generally the only way to claim the credit is on the 941X. That being said, the 941X assumes that the IRS already has an original 941 on record. If this is not the case and an original was not filed (ex: someone forgot to mail it out), then it would be wise to file the employee retention tax credit on the original document.
This would save a lot of time for the IRS to process the request, and save you money on professional services fees to file on your behalf.
4) How do qualified wages and eligible employers wages effect eligibility?
This is one of the more complex questions of eligibility. The IRS has outlined much of the answer in their documentation: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-qualified-wages-faqs.
How does this apply to your business and unique situation? Contact us and we’ll help you sort through the details.
5) What does the CARES act have to do with ERTC?
The CARES (Coronavirus Aid, Relief, and Economic Security) Act was established in early 2020, at the beginning of the COVID-19 pandemic, as a way to support Americans and mitigate economic damage caused by this crisis.
Benefits focused on families with children, workers, businesses, and healthcare. This $2.2 trillion stimulus bill authorized the stimulus checks of $1200, tax rebates, moratoriums on foreclosures and evictions, unemployment assistance, as well as grants and loans for businesses.
The PPP (Paycheck Protection Program) was one of the most well-known benefits for businesses that many took advantage of early on. The ERC (Employee Retention Tax Credit) was the next large benefit provided for businesses.
6) What is the PPP?
The PPP instated by the CARES Act set aside $349 billion to support small businesses. The goal was to incentivize eligible employers to keep on employees and help manage their expenses.
The PPP was a loan for up to 2.5x their monthly average payroll. Up to $10 million. Fees, collateral, and personal guarantees were waived. And loans could be paid back between 6-12 months.
The loan principal could be forgiven up to the cost of payroll and other overhead expenses during the 8 weeks after the loan was processed. The amount forgiven was reduced if there was a reduction in employees during that time.
7) How does PPP relate to ERC?
While many mistakenly believe they cannot qualify for both the PPP loan and ERC funds, that is not the case. You cannot use the same employee wages to qualify for both. The 8 weeks of qualified wages covered by the PPP loan cannot be used in applications for employee retention credit. But after those 8 weeks, there is likely a large chunk of payroll costs that you may be able to use to qualify for ERC.
Be careful to keep records of payroll and other expenses, as well as application documentation. An experienced financial advisor or accountant can help you in taking advantage of both government programs.
8) What's the difference between the PPP loan and the ERC?
The PPP was a loan that may or may not have needed to be paid back. The ERC is tax credits that do not need to be paid back.
PPP loan funds were delivered by direct deposit. ERC is payable via a check from the IRS.
To receive PPP loan funds, you went through an application process. With employee retention credit, you can receive funds by filing or amending form 941.
9) How do payroll taxes work with ERTC?
Employee retention credit is received against payroll taxes collected from employees when processing payroll.
The employee retention tax credit can be used to offset dollar-for-dollar eligible employers payroll taxes and the employer share of Social Security taxes on qualified wages consisting of 6.2% OASDI and 1.45% Hospital Insurance. The employee retention credit does not effect the employee’s Social Security taxes.
10) What is a Recovery Startup Business?
Even if you don't qualify based on revenue drop or operations interruption, you may qualify based on when you started your business.
Did you beging conducting business after 2/15/2020?
Was your average annual gross receipts not over $1 million for 3 years ending with the year before the same calendar quarter you wish to take credit?
If you answered yes to both questions, you may qualify.
11) What are considered qualified wages?
According to the IRS, qualified wages are wages and compensation paid to employees after March 12, 2020, and before January 1, 2021. Qualified wages include health plan expenses. Qualified wages also depend on the number of full-time employees employed in 2019.
How to make ERTC simple, fast, and easy.
We hope this article cleared up a lot of confusion and misconceptions about the employee retention credit. The sad reality however, is that many business owners do not have the time, energy, or resources to aggressively educate themselves and pursue the assistance they need.
The CARES Act was established as the largest financial rescue package in U.S. history. And small businesses have been the recipients of 26% of those funds. And yet, there are massive quantities of businesses that qualify for employee retention credit and have not received it.
Part of the problem is that the guidelines are not made simple or accessible to most business owners. The other part of the problem is that financial advisors and accountants for small businesses may mistakenly believe their clients do not qualify.
In this unprecedented time, it's more important than ever for businesses to have partners they can trust to keep them up to date on grants, loans, and funding. Many small businesses cannot afford a business consultant or advisor. But most businesses have someone who handles bookkeeping and/or accounting.
Not only does having an educated accountant open up opportunities for funding, they can handle the complicated processes of applying for programs. Taking stress off of you, the business owner, and adding time back to your life.
How to find an accountant that helps with ERC
When looking for an accountant for your business, there are a few areas to seriously consider.
Make sure your bookkeeper or accountant offers insights on government programs that can get you the funding you desperately need. An ideal accountant will keep themselves up to date and educated on the latest in pandemic assistance, tax credits, and other programs.
If you employ an in-house bookkeeper, it is understandable they may not have the resources to keep up on the latest news and provisions. That's why we recommend you outsource your bookkeeping, payroll, and accounting to an accounting group or firm.
Why outsource accounting? You don't have to worry about turnover. You’ll always have a dedicated manager for your account. A highly trained staff gets payroll admin tasks done faster. You gain an entire firm’s worth of knowledge, ready to handle any unique situation you find yourself in. And a full-service firm will not only do bookkeeping, but will consult on other accounting and operational tasks.
The accounting group you choose should meet three important standards: they are always looking for ways to increase your income. They are intent on searching out ways to cut costs and expenses. They are educated and up-to-date on the CARES Act, as well as grant, loan, and tax credit programs that fit your business. Ideally your accountant will double as an ERTC consultant.
More ways you can help your business survive and thrive post-pandemic
After you have received all the funding you qualify for, there are other ways you can support your employees and business to ensure you thrive during these challenging economic times.
Our top tips for our clients are as follows:
Keep calm and carry on. Don't let the natural fight or flight instinct of financial stress kick in. You'll be much more likely to make rash decisions that could damage your business. As a business owner, you're already familiar with the unpredictable ups and downs of business. Economic downturns can not only be survivable, they can be opportunities for growth. Don't overreact and cut expenses or slow down operations unnecessarily. You can weather any storm with the right resources and help!
Roll up your sleeves. When the economy is rough and money is tight, you have to double-down on your efforts and ingenuity. When sales and business are slow and you have more time, it's the perfect opportunity to put yourself to work finding ways to boost your business.
There's no I in TEAM. Are you catching on to a trend here? These somewhat corny sayings can have some real truth in challenging times. If you are a B2B business, it's likely your clients are stressing over the same concerns as you. Reach out to your customers and ask how you can help them. They will be impressed by your involvement and will want to spread the word to others in their network.
Anything you can offer your customers at no cost to you (but perhaps more effort), provide it for free. They may even return the favor.
Don't skimp on marketing and advertising. Most of your competitors will cut marketing costs first. Advertisers may reduce their prices to incentivize more work. Take advantage of less competition and lower fees to perhaps even boost your marketing more than ever.
Get rid of dead weight. This tip may be a little harsh, but when your situation is especially challenging, it can make a huge difference. If you are looking at cutting employee hours or facing layoffs, make sure you are letting go of those who are underperforming or failing to cooperate with others. You can even look at cutting loose clients and customers who are underpaying and making your job more difficult. Cut the bottom 20% of your customer base (as Forbes suggests) and bring in better clientele with your marketing efforts.
Take advantage of downtime. With any free time you gain while business is slow, use it to look at ways to improve your operations. Can you shorten your sales cycle? Can you improve your online presence? What can you do at little to no cost to improve the quality of your products or services? Focusing on improving customer service can be huge. You can also pursue reviews from your satisfied customers to improve your reputation online.
What can your accountant do? Give them this list to support your business during an economic downturn:
Create a quarterly cash flow forecast
Plan for a worst-case scenario and compare with your current financial plan
Investigate options for liquidity
Discuss your business risk rating and loans with your bank
Investigate risks to your cash flow, including vendors, contracts, and clients
Review the budget and look for areas to cut costs, including finding better costs from competing vendors
Research the latest in tax deductions that can apply to our business
Look for redundancies and any suspicious or extraneous charges in the accounts
Identity our top revenue-driving activities
Realign projections and adjust forecast models
If operations are temporarily shut down or reduced, maintain the books as usual