With the modifications made to the incentive, businesses continue to evaluate how to maximize the Employee Retention Tax Credit (ERTC). The ERTC is a special incentive created within the 2020 Coronavirus Aid, Relief, and Economic Securities (CARES) Act that encourages employers to retain their workforce during periods of economic disruption caused by the coronavirus pandemic. It provides immediate reductions to payroll taxes and cash refunds for credits in excess of payroll taxes, for both commercial and nonprofit employers. A business must have been subject to government shutdown orders or experienced a significant decline in gross receipts to qualify.
The credit is claimed by eligible employers on their payroll tax filing. There is still plenty of time to claim it both retroactively for 2020 and for 2021.
The ERTC savings can be significant for struggling businesses, but applying for the credit and receiving its full benefit is easier said than done. The complexity of certain rules pertaining to the tax credit makes it a challenge to determine eligibility.
Below, we help you navigate through the four most common oversights businesses make when trying to secure the ERTC:
Foreign Employees Not Included in the Headcount
The ERTC is a per-employee credit, equal to a percentage of qualified wages and health plan expenses paid to each employee. To calculate the amount of the credit for your business, you must determine if your organization is considered a large employer or a small employer. After all, the difference between the two is significant.
A small employer can count all wages paid to each employee towards the credit; a large employer can only count compensation paid to employees not working. For 2020 credits, eligible small employers are defined as having 100 or fewer full-time employees. For 2021 credits, eligible small employers are defined as having 500 or fewer full-time employees. Large employers are any organization with full-time employees above the small employer threshold; there is no upper limit to eligibility.
The definition of a full-time employee is an employee who had an average of at least 30 hours of service per week as determined under Internal Revenue Code (IRC) Section 4980H. Service performed outside the United States does not count towards the 30 hours per week measurement. Therefore, foreign employees do not count as full-time employees.
Part-Time Employees Included in the Wage Count
While the number of full-time employees is vital in determining whether you’re a small or large employer, it doesn’t fully determine the amount of credit you are due. To calculate wages — on which you base your credit — employers refer to Section 3121(a) of the IRC.
Eligible employers can claim the credit against 50% of qualified wages between March 13, 2020, and Dec. 31, 2020. The maximum amount of qualified wages and health plan expenses for this period is $10,000 for the year. In addition, eligible employers can claim the credit against 70% of qualified wages between Jan. 1, 2021, and Dec. 31, 2021. The maximum amount of qualified wages and health plan expenses is $10,000 per quarter for this period.
Under Section 3121, wages are calculated for all employees, regardless of part-time or full-time status. For example, suppose your organization qualifies as a small employer because it consists of a small number of full-time employees, yet it also employs a large number of part-time employees. In that case, the ERTC may be very substantial.
Paycheck Protection Program Loan Forgiveness Not Included in Gross Receipts
Whether you’re a small employer or a large employer, you still need to be deemed eligible. As stated earlier, eligibility requires that your business be subjected to a government shutdown or have experienced a significant decline in gross receipts.
For 2020 credits, a significant decline in gross receipts is defined as a decline of at least 50% in any 2020 calendar quarter compared to the same quarter in 2019. For 2021, it is defined as a decline of at least 20% in a quarter of 2021 versus the same quarter of 2019. Fortunately for recipients of the pandemic-related Paycheck Protection Program (PPP) loans, the forgiveness of these loans is not included in gross income, which leaves the gross receipts test to be based only on other business activity.
Another nuance that was retroactively changed for the ERTC was that recipients of the pandemic-related Paycheck Protection Program (PPP) loans could also claim the ERTC. The Consolidated Appropriations Act, 2021 permits PPP loan recipients to also claim the ERTC, provided that the credit doesn’t cover the same wages used to substantiate PPP loan forgiveness. PPP loan recipients can ensure they are combinining the two COVID-19 benefits appropriately by carving out any PPP loans that were forgiven from gross income. This helps ensure that if your company took a PPP loan, then the same wages will not be counted for PPP forgiveness.
Avoiding Unnecessary Fees in the Process
The point of the ERTC was to provide a financial benefit for organizations that are struggling from the pandemic disruption, but because the credit may be more challenging to apply, companies that choose to take it may elicit the help of boutique consulting firms for assistance. Organizations using such consultants to help with the ERTC should be mindful of what they’re paying for that service. Non-accounting firms — not bound by AICPA standards — may charge a percentage of your total benefit. Those types of billing arrangements are costly, and could force you to leave a portion of your benefit on the table.
Choosing an accounting firm bound by AICPA standards, which does not charge contingency fees, will ensure you receive what is rightfully due.
For More Information
If you have questions about the ERTC, please contact us.
Copyright © 2021, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.
CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).