IRS changes on ERC: Why don’t all Businesses Qualify for the credit? Learn more !

Maximize Your Savings:
Employee Retention Credit Explained

Are you looking for ways to enhance your business’s financial health? Dive into the world of Employee Retention Credit (ERC) 2024 with our comprehensive guide. Learn how to unlock substantial savings through expert strategies and insights.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC)is a tax credit created under the CARES Act. This refundable tax credit is a relief measure for businesses that encourages them to keep employees on their payroll. The ERC legislation was expanded under the Consolidated Appropriations Act, which took effect on January 1, 2021, and because of this expansion, all employers who took PPP loans could be eligible for the ERC for 2020 and 2021.

2020

In 2020 eligible businesses can claim up to $5,000 per employee for the year.
The IRS deadline for 2020 is April 15, 2024

2021

In 2021 eligible businesses can claim up to $21,000 per employee for the year.
The IRS deadline for 2021 is April 15, 2025

What Are the Recent Updates and Changes to the Employee Retention Tax Credit? (September 2023)

    Employee Retention Credit 2022-2023

    In 2022 and 2023, the Employee Retention Credit (ERC) saw important changes to support economic recovery during the COVID-19 pandemic. Notably, eligibility expanded to include startups, previously excluded, broadening access to essential financial support. The credit rate also increased for employee wages, incentivizing job retention and reinforcing business financial stability, contributing to ongoing economic recovery efforts.

    Employee Retention Credit 2021-2022

    In 2021 and 2022, the Employee Retention Credit remained crucial for pandemic-affected businesses. Its availability was extended, ensuring ongoing support. The American Rescue Plan Act (ARPA) further boosted the credit, raising the maximum per-employee amount and widening eligibility, especially for severely distressed businesses. These changes aimed to sustain businesses during a challenging economic environment.

    Employee Retention Credit 2020-2021

    In 2020 and 2021, the Employee Retention Credit was vital amid pandemic challenges. Established by the CARES Act, it evolved to allow businesses to claim a tax credit for employee wages during revenue declines or shutdowns. This lifeline aided countless employers in retaining their workforce during economic uncertainty, showcasing government commitment to business and job preservation during an unprecedented global crisis.

Calculating the ERC

How can businesses calculate and claim the ERC for each eligible Employee? Read more here.

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    Percentage Calculation

    For 2020, the ERC is 50% of qualified wages, up to a maximum of $10,000 per employee for the full year. For 2021, the ERC is 70% of qualified wages, up to a maximum of $10,000 per employee per quarter.

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    Eligible Quarters

    Identify which quarters your business is eligible for the ERC. Generally, it applies to quarters in which your business experienced a significant decline in gross receipts or was subject to government-ordered closures.

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    Maximum ERC Per Employee

    Calculate the maximum ERC amount per eligible employee for each eligible quarter. For example, if you have an eligible employee with $10,000 in qualified wages in Q2 2021, the ERC for that employee would be $7,000 for that quarter.

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    Aggregate ERC Amount

    Sum up the maximum ERC amounts for all eligible employees for each eligible quarter. If a company qualifies for all three quarters (1-3) of 2021, the maximum ERC amount that can be obtained for that year is $21,000.

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    Recovery Start Up ERC

    If you qualify as an eligible recovery startup business you can claim the credit as any other entity through either declining gross reciepts or government mandated shutdown. If you do not qualify through either of these two then you can claim up to a maximum of $50,000 for Q3 and Q4 of 2021, each.

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    Total ERC Refund

    Your business’s total Employee Retention Credit (ERC) refund is calculated by adding the ERC amounts from each eligible quarter, plus interest accrued from the IRS based on the credit’s value and the time since initial eligibility. Note that the IRS will offset any outstanding taxes against the credit before issuing the refund.

Applying for the Employee Retention Credit

    Determine Eligibility

    Ensure your business meets the eligibility criteria for the ERC. Eligibility may include experiencing a significant decline in gross receipts or being subject to government-ordered closures due to COVID-19.

    Gather Necessary Documentation

    Collect documentation to support your ERC claim. This may include payroll records, employee information, financial statements, and any other relevant documents.

    Calculate Qualified Wages

    Determine the qualified wages paid to eligible employees during the ERC-eligible periods. Qualified wages can vary based on the number of employees and your business’s revenue.

    Complete IRS Forms

    se the appropriate IRS forms to claim the ERC. The primary forms for ERC claims are Form 941 (Employer’s Quarterly Federal Tax Return) for most employers or Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees) for agricultural employers.

    Report ERC Amount

    On the applicable IRS form, report the ERC amount for each eligible quarter. Ensure accuracy in reporting and follow IRS instructions for line items related to the ERC.

    Amending Income Tax Returns

    The IRS does not allow double dipping, as wages were used to calculate the credit, they need to be removed from deductions for each eligible year. This must be done before the statue of limitations for that tax year.

    Maintain Records

    Keep detailed records of your ERC calculations, supporting documentation, and file forms. This is crucial for IRS compliance and potential audits.

How Leyton Can Help

Our services extend to help clients who did not hire us for the study. We can also offer ERC Representation by helping try and reduce or abate penalties if the IRS assesses them. We can do more than just ERC audits- we can assist with Employee Retention Credit Representation and disputes with the IRS.

How will I receive my Employee Retention Credit (ERC) refund?

Like any refund, the IRS will send it via a check in the mail/direct deposit. Once you’ve successfully claimed the ERC and any excess credit remains after offsetting your payroll tax liabilities, the IRS will process your refund in one of the following ways

When can I expect to receive my Employee Retention Credit (ERC) refund?

It’s important to be aware that the general timeline for receiving your Employee Retention Credit (ERC) refund typically falls within the range of 3-6 months from the time you file your claim.

Frequently Asked Questions

Questions to Ask Your ERC Service Provider

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Have you successfully defended a client in front of the IRS?
Do you have Tax attorneys on staff who are knowledgeable in understanding the rules and requirements of ERC Tax Credit?
Do you have a Quality Control process?
Do you have an established track record before Employee Retention Credit?
Will the business still be here in 3 years’ time to help in the event of an audit?

Is the Employee Retention Credit taxable income?

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No, the refund given by the IRS is completely tax-free. Please note however, that like other tax credits, for-profit companies will need to reduce their salary and wage deductions by the credit amount in the qualified years to get this tax-free status. The benefit of the tax-free refund greatly outweighs this requirement. Non-profit companies do not need to worry about this part.  

How do I report the Employee Retention Credit on 1120s?

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You do not need to report the ERC as it is tax-free, however for-profit companies will need to reduce their salaries and wage deductions for the qualified year by the credit amount within 3 years of claiming the credit in order to prevent penalties from the IRS.  

Are nonprofit organizations eligible for the ERC?

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Nonprofits with W2 employees are, in fact, eligible. Since ERC is a payroll tax credit, any payroll taxes paid for employees will be refunded and any excess credit will also be refunded. 

Can I claim the ERC for wages paid to remote workers?

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Yes! The location of the employee does not affect their eligibility to be included in the calculation so long as they are paying US payroll taxes. 

What documentation do I need to support my ERC claim?

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he three primary documents that will always be needed are:
Quarterly P&Ls for 2019, 2020, and 2021 (specifically gross receipts are what’s required) 
Quarterly payroll for each employee for 2020 and 2021 
Information on any PPP loans received by the company 
There may be additional information required depending on company structure and qualification path. For example, if a company qualifies through the government mandated shutdown path then specific government mandates will require to determine start/end dates of the eligible shutdown as well as potential supporting financial information on the shutdown’s impact. If a company owns, or is owned by another entity, or the owners are shareholders of other entities, then additional P&Ls and payroll might be required for an accurate assessment of eligibility. 

How long should I retain records related to my ERC claim?

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It’s advisable to keep all relevant records for at least four years, as the IRS may request documentation for verification. 

What is Form 941-X, and how does it relate to the ERC?

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Form 941-X is used to make corrections to previously filed Form 941, which reports payroll taxes. It is relevant to the ERC when you need to amend your payroll tax filings to claim or adjust ERC amounts.

Can I amend previous tax returns to claim the ERC retroactively?

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Yes, you can amend previous returns to claim the ERC for eligible quarters.

Can I claim the ERC for healthcare expenses for my employees?

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Yes, healthcare expenses can be included in the ERC calculation.

What documentation should I include when submitting Form 941-X for ERC corrections?

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Include supporting documentation, such as payroll records and documentation of eligible employees and wages, to substantiate your ERC claims on Form 941-X.