Has the Government-mandated Covid shutdown brought your cash flow to a halt? Have you been able to operate, but still haven’t been able to get your revenues up to the level they were at before all the lockdown madness of 2020? Here's a brief overview of how the federal Employee Retention Credit (ERC) can get you up to $33,000 (per employee) in refundable federal tax credits through the end of 2021.
Please note: it is highly recommended to reach out to a professional in order to maximize your ERC as there are many factors that need to be considered when applying for this credit, including (but not limited to) Payroll expenses paid for with PPP Loan funds, employees’ relation to owners, federal tax credits received per employee (FFCRA and R&D credits), and actual pay dates where payroll was disbursed. In the same vein, it is paramount to ensure that your PPP Loan forgiveness application is done in tandem with the ERC calculation in order to maximize BOTH your forgiveness amount, as well as the ERC that is due back to you.
What is the ERC?
The Employee Retention Credit (ERC) is a federal payroll tax credit that was designed to help bolster employers’ cash flow during this time that businesses have been in a cash flow slump due to the effects of the COVID-19 pandemic. The credit is calculated over 5 total periods, which could net employers up to 5 separate credits. The periods for these 5 credits are March 13, 2020 - December 31, 2020 (when the initial lockdown occurred), and one for each calendar quarter of 2021.
How do I Claim the ERC?
The ERC can only be claimed on your Quarterly Payroll Tax return (form 941), or on an amended 941 (form 941-X). There are MANY roads to get to the same destination, but some most definitely have more turns & bumps than others. Four of the most common methods are as follows:
- Employers have the option to withhold payroll taxes during the calendar quarter and claim a refund for any additional amounts necessary on the 941.
- Employers can wait until the end of the quarter, calculate the credit manually, then claim the credit on the form 941 before being electronically filed.
- Employers can wait until the 941 is already filed, then subsequently file a 941-X to claim the credit. While this method may be more accurate as you have more time to prepare an accurate calculation it will most definitely take longer to get the cash back.
- Employers can claim an advance on funds that are expected to be received for the quarter, then reconcile the final amount that’s due to them on their quarterly tax filing.
How much can I get back?
Depending on eligibility, employers can get back up to $33,000 per employee! There is a potential credit of $5,000 per employee for the 3/13/2020-12/31/2020 period, and then an additional $7,000 per employee PER QUARTER of 2021, which equates to a total of up to $33,000 per employee from 3/13/2020 - 12/31/2021. This total amount is dependent on many factors, for example when the wages were paid to employees, reducing eligible wages by any federal tax credits, and considering how forgiven PPP Loan funds were used to pay for employees’ gross wages.
How do I calculate the ERC?
As there are many factors to consider when calculating the ERC, performing the calculation is truly different for each business. Some businesses may experience calculations that can be as easy as taking a percentage of each employee’s gross wages and applying it towards the credit, while others may need to consider factors such as (including but not limited to) Payroll expenses paid for with PPP Loan funds, employee’s relation to owners, federal tax credits received per employee (FFCRA and R&D credits), and actual pay dates where payroll was disbursed.
Once again, it is highly recommended to reach out to a professional in order to maximize your ERC, and in the same vein it is paramount to ensure that your PPP Loan forgiveness application is done in tandem with the ERC calculation in order to maximize BOTH your forgiveness amount, as well as the ERC that is due back to you.
Disclaimer: eligibility and refund amount not guaranteed