Employee Retention Tax Credit Application

The Employee Retention Credit (ERC or ERTC) is a tax credit established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 to assist businesses with maintaining payroll during COVID-19 pandemic outbreak.

Businesses of all sizes that fulfill certain eligibility requirements may take advantage of ERC funding program services. To be considered eligible, businesses must meet these criteria:

Pay qualified wages to employees after March 12, 2020 and before January 1, 2022. Experienced significant revenue loss during the pandemic.

Do not dismiss or furlough employees to claim the ERTC funds.

A business's eligibility to claim ERTC funds depends on both the number of employees it employs and qualified wages it paid, up to a maximum credit per employee of $26,000.

The ERC funding program is a refundable tax credit, so businesses can claim it even if they owe no taxes at all. They should do this on their federal income tax returns for the year in which they paid qualified wages and claim it there.

Businesses impacted by pandemic can turn to the Employee Retention Credit as an invaluable way to continue paying employees during this period of turmoil. By providing much-needed financial relief and keeping key employees on payroll, this credit may help organizations retain talent.

Here are a few more details regarding the ERC:

The ERC fund can be claimed on qualified wages paid in 2020 and the first three quarters of 2021, up to 90% of qualified wages paid can qualify, although it cannot be applied towards employees who are 1099 contractors.

Businesses claiming the ERC fund must keep records of qualified wages paid and number of employees retained.

If you are considering applying for the ERC, reach out to us first to ascertain eligibility and we can use our ERC calculator to determine how much credit can be claimed.

The ERTC fund program is dependent on which quarter qualified wages were earned and paid out in. Their eligibility requirements therefore may change accordingly.

Gross Receivables Test for Wages Paid in 2020: Businesses may qualify if their gross receipts experienced an at least 50-percent decrease from what it was at this same period in 2019

Government Mandate Test: Businesses may meet eligibility requirements if required to cease operations or reduce employee numbers due to government orders related to COVID-19. Wages Paid in 2021 Before March:

Gross Receipts Test: Businesses may qualify if their gross receipts experienced a significant decrease over the quarter in which qualified wages were paid compared to 2019. For qualification, this decrease must exceed 20% from 2019.

Government Mandate Test: Businesses may meet this eligibility threshold if they were required by a government order relating to COVID-19 to temporarily stop operations or reduce employee numbers. Businesses eligible for ERC funding grants must satisfy two additional tests; gross receipts or government mandate.

It should also be noted that businesses or tax-exempt organizations not meeting these requirements cannot qualify for ERC funding grants, with exception to employers that were laid off between March 12, 2020, and January 1 2022 in order to claim these credits, nor those that laid off or furloughed employees just so they could claim them and claim them when making their claims; also excluded is anyone making false claims of tax credits that come under Section 1111 of USTTC.

These entities do not qualify for the ERTC fund program:

Federal, state and local governments and their instrumentalities as well as Indian tribal governments (and their instrumentalities). Nonprofits that do not qualify as tax exempt; businesses not organized for profit without being tax-exempt and paying wages to employees who are 1099 contractors.

The Employee Retention Credit Grant was introduced under the CARES Act as an employee retention incentive designed to aid businesses during COVID-19 pandemic outbreak. Eligible businesses that paid qualified wages between March 12, 2020, and January 1 2022 can claim this tax credit grant.

ERC Grant 2023 Eligibility Criteria

To be eligible for an ERC grant 2023, businesses must meet all of the following criteria.

Attain a tax credit by operating either as a for-profit business or tax-exempt organization during the eligible year in which wages were paid as qualified wages to some or all employees during this eligible period (the timeframe could differ for businesses with tax-exempt status).

Have experienced a substantial reduction in gross receipts during their eligible period. Not be affiliated with government entities or financial institutions. And have been awarded with an ERC Grant.

A grant for ERC employees can be calculated based on both qualified wages paid during an eligible period and any decreases in gross receipts during that same time frame; maximum credits available per employee is $26,000 per employee.

How to Claim ERC Grant

The ERC grant can be claimed when filing either an initial or amended employment tax return for an eligible period. As its credit is refundable, businesses could even file if no taxes are owed.

Your eligibility for an ERC grant depends upon both the total wages paid to employees as well as qualifying wages paid per employee.

Businesses employing 500 or fewer employees may claim up to $5,000 for qualified wages paid out during 2020; larger organizations can claim an extra $10k per employee in qualified wages paid during that year. Wages paid during the first three quarters of 2021:

Businesses employing 500 or fewer workers may claim up to $7,000 of qualified wages paid during the first three quarters of 2021 for employees claiming them as qualified expense payments.

Businesses employing over 500 workers can claim up to $10,000 of qualifying wages paid during the first three quarters of 2021 for employees claiming a wage credit.

Qualified Wages: Qualified wages refers to earnings paid directly to employees who aren't 1099 contractors for leave periods such as sick leave, family medical leave and military service leaves that fall outside of 1099 contracts, such as sick leave. Furthermore, qualified wages also cover earnings during leave periods like sick leave.

ERC grants are limited to $26,000 per employee; therefore a business with 10 employees could claim up to a total of $260,000 in ERC credits.

How to Calculate ERC Grant Amount:

Follow these steps to ascertain how much ERC grant you're entitled to claim and claim for.

Determine how many employees are in your payroll system as well as total qualified wages per employee; multiply these two values together before multiplying this result by your Employee Review Committee percentage - usually 10%.

Example: During the first quarter of 2021, a business employing 10 workers paid each of them $10,000 in qualified wages during that quarter and claimed an Employment Retention Credit worth $70,000 during that time frame.

Penalty for ineligible claims:

Businesses claiming the ERC grant and later discovered not meeting eligibility may face fines of up to 50% of its value as credits.

Under ERC aggregation rules, businesses that belong to controlled groups must calculate their ERC as one employer. A controlled group refers to any collection of businesses under common control that share similar financial and operational objectives.

There are three categories of controlled groups.

Parent-subsidiary: A parent-subsidiary controlled group refers to any group of businesses where one company owns more than 50% of them, including parent businesses that own at least 51%.

Brother-sister: A brother-sister controlled group is defined as any group of businesses where five or fewer persons own at least 80% and at least 50% voting power in those businesses, or are aggregated according to section 414(o).

Businesses belonging to controlled groups must determine their ERC by:

Combine their gross receipts for all businesses within their group.

Combine employee counts among these enterprises.

Calculate their ERC as a single employer.

Due to complex ERTC aggregation rules, it is wise to give us a call in order to assess whether your business falls within their scope and we can use our ERC calculator to help determine your credit.

Here are a few examples of how ERC Aggregation Rules work:

Example 1: Consider a business with two subsidiaries that is eligible to apply for ERC grants and each subsidiary's gross receipts and number of employees can be aggregated together to calculate ERC eligibility. When computing ERC eligibility for all three businesses combined.

Example 2: Five individuals own 20% each in an eligible business that meets ERC eligibility. Collectively, these five owners can combine gross receipts and employee counts from this business in order to calculate the ERC payments due them as individuals.

Example 3: Consider a business owned by three individuals, where one owns 60% and two hold 20% each; thus making them eligible for ERC eligibility, though due to it not being controlled by brothers-sister controlled groups they cannot aggregate gross receipts and number of employees for calculations of ERC contributions.

No taxes are due on an ERTC grant because it counts as a tax credit and reduces what's due. Furthermore, an ERTC grant should not be considered income and therefore shouldn't need to be taxed accordingly.

However, this rule can have some exceptions; if your ERC grant is used to offset taxes that you owe on other income, a portion may need to be taxed as income offset by it. Also if your company operates as a pass-through entity and receives ERC grants directly allocated by them as grants might need to be considered taxable income as well.

If you need guidance regarding your tax obligations for an ERC grant, give us a call and we would be happy to discuss this further with you.

Here is more information regarding ERC grants and taxes:

The ERC grant is a refundable tax credit, so even if you do not owe taxes you can claim it even if it does not count as income and increase taxable levels; its use does not incur self-employment taxation obligations either.

ERC grants are exempt from federal unemployment taxes (FUTA), although pass-through entities (those which don't pay federal income tax, but their owners do), may still owe taxes as ERC grants count as income and may incur self-employment and FUTA liability.

If you need advice regarding whether you must pay taxes on an ERC grant, seek the advice of an accountant.

To calculate an ERC credit using PPP, the following will need to occur.

Calculate the total qualified wages paid between March 12, 2020, and January 1, 2022 to employees as qualified wages under ERC percentage rules. PPP loan proceeds received, ERC credit calculated as follows.

Subtract the amount of PPP loan proceeds received from ERC credit amount received, then multiply that figure by 0.6833 and divide by 100 to determine an applicable ERC percentage:

100 for wages paid during 2020; or 70 percent if wages paid are in the first three quarters of 2021.

Example:

A business employing 10 workers paid out $10k each in qualified wages in the first quarter of 2021 and received a PPP loan totaling $100K, earning itself an ERC claim worth $70,000 for this first quarter alone.

To calculate an ERC credit without using our ERC tax credit calculator, the business would first multiply each employee's qualified wage payment times their number and multiply this total amount with 70% as their applicable ERC percentage for an estimate of $100,000 qualified wages paid; multiply this figure again using 70% ERC as applicable and they should have an estimate of an ERC credit equaling $70,000 before subtracting their PPP loan proceeds amount from this final ERC Credit balance for their final calculation which should equal $0.

Important note:

The ERC credit should not be used to offset PPP loan forgiveness; rather it can only be claimed against qualified wages that were not used to repay any PPP loans.

ERC credit may have certain restrictions and eligibility restrictions; such as its maximum amount and eligible employees. If you need help calculating it using PPP, reach out to us and we would be happy to use an ERC tax credit calculator to help you.

Timelines for the ERTC program depend on numerous variables, including when and how the IRS processes applications, amount of credits awarded and payment method selected.

Processing Time

Unfortunately, the IRS is experiencing a backlog when processing ERTC refund applications. By August 2023, they had processed over five million refund applications; however there remain millions more applications pending for approval. Although they strive to process applications as rapidly as possible, some businesses could experience significant delays before receiving their refund.

Size of Credit

The size of an ERTC refund can have an impact on when funds will arrive; according to IRS reports, priority processing of applications submitted for businesses with larger credits means those receiving smaller ERTC refunds could wait longer before seeing funds appear in their bank accounts.

Payment Method

A company's choice in payments may have an effect on when their funds arrive; businesses who elect for direct deposit could receive their refund more quickly than businesses who request checks in the mail.

Given all these considerations, it could take several months before some businesses receive their ERTC program refunds; however, the IRS is working diligently to expedite applications as quickly as possible, so businesses who have submitted applications should continue monitoring their status through its website.

Below are a few more tips for businesses waiting on ERTC refunds:

Make sure that all required documents have been included with your application and track its status on the IRS website. If any questions arise regarding it, contact them immediately.

ERC Refund Timeline 2023

Although the IRS has yet to announce an official ERC refund timeline 2023, given their processing times for ERC refunds in 2022 it could take several months before businesses receive their ERC reimbursements in 2023.

If you are looking to speed up this process we also offer ERC loans where we can give you an advance on the refund. To learn more about our ERC loans process click here.