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February 18, 2021 | Posted in:

The Employee Retention Tax Credit: Frequently Asked Questions

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    [Updated March 19, 2021] New legislation passed on December 27, 2020 expanded the Employee Retention Credit that was originally introduced with The CARES Act in March of 2020. The new legislation has left employers with many questions about how they can now use the Employee Retention Tax Credit along with their Paycheck Protection Program (PPP) loans.
     
    Note: The below content is for general informational purposes only and may vary based on your specific circumstances. We encourage you to reach out to your CPA and advisor for an analysis on if you will benefit from taking advantage of the Employee Retention Tax Credit. Consult with your payroll company about filing amended returns. This is one area where it is beneficial to work with a CPA firm who has partnered with a payroll company. Learn more about the Alloy Silverstein Group here.
     


     

    Alloy Silverstein’s Employee Retention Tax Credit Webinar Recording

    The following questions have been asked by clients and by business owners who attended our webinar “Breakfast Briefing: The Employee Retention Credit” on January 28, 2021.
     


     

    The Employee Retention Tax Credit: FAQs

    Q: What is the Employee Retention Tax Credit?

    A: The Employee Retention Tax Credit was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act back in March of 2020 and has been extended following the December 2020 legislation, the Consolidated Appropriations Act. It is a tax credit reported on federal payroll tax returns (Form 941) that applies to wages paid after March 12, 2020 and before July 1, 2021.

    NOTE: The new $1.9 trillion relief bill passed on March 11, 2021 made adjustments to the ERC. Consult with your CPA.

    Q: How does the new American Rescue Plan Act affect ERC for 2021?

    A: The ARP expands and extends the Employee Retention Tax Credit (ERC) through December 31, 2021. The bill expands the ERC to allow certain severely distressed businesses to claim the credit for a greater share of employee wages. It also expands the credit to include startups and new businesses formed after February 15, 2020 if they have less than $1 million in revenue.

    Q: What is the credit amount for the Employee Retention Tax Credit?

    A: It depends on the year you are taking the ERC. For 2020, 50% of qualified wages up to $10,000 qualified wages per employee for all quarters ($5,000/EE for all of 2020). For 2021, 70% of qualified wages up to $10,000 qualified wages per employee for any quarter ($7,000/EE for each 2021 quarter).

    Q: Am I allowed to take the Employee Retention Credit if I also received a Paycheck Protection Program (PPP) loan?

    A: When the Employee Retention Tax Credit was first introduced in March with the CARES Act, no, you could not have utilized the ERC if you had also received a PPP loan. However, the new legislation from the CAA released in December of 2020, now allows employers to take the ERC if they received a PPP loan. However, it is important to understand the best way to use both to maximize both your PPP loan forgiveness and employee retention tax credit.

    Q: Which employees are eligible to claim the Employee Retention Tax Credit?

    A: It depends on the size of your business. For small employers, 100 or fewer full-time equivalents (FTEs) in 2020 and 500 or fewer FTEs in 2021, the business can claim the Employee Retention Tax Credit for all employees. For large employers, the Employee Retention Tax Credit can only be claimed for wages paid to employees not working. See question #15 for guidance on wages paid to relatives besides the owner and spouse of the business.

    Q: Is the Employee Retention Tax Credit available to nonprofits, 501(c)(3), who do not file tax returns but file form 941?

    A: If you do not file payroll tax returns federal form 941 or 943 you cannot claim the credit.  Not-for-profit entities, 501(c)(3), are eligible provided you meet all of the other criteria.

    Q: If my business had no reduction in revenue in 2020, am I eligible for the Employee Retention Tax Credit?

    A: Even if your business had no reduction in revenue for 2020, you could still qualify for the Employee Retention Tax Credit if you were subject to a government shut down or restrictions on your business, but the timing of the credit is more restrictive.

    Q: If the business shows a loss for 2020, is it not eligible for the Employee Retention Tax Credit?

    A: If you have a 50% reduction in 2020 (20% in 2021) in gross receipts or greater, you would be eligible under this test.  The profitability of the company is not a factor.

    Q: Does the Employee Retention Tax Credit carry forward?

    A: No, the Employee Retention Tax Credit is a use or lose.  In 2020, if you did not use the full amount of the $5,000 per employee credit, you cannot carry that into 2021.  It resets in 2021.  Then in 2021, it increases to $7,000. Again, that is per quarter and does not carry forward per quarter.

    Q: Does working remotely disqualify a business from the Employee Retention Tax Credit?

    A: No, not if your business operation was still significantly impacted. However, if you were functioning perfectly fine working remotely, then no, you would not qualify.

    Q: Can you receive the Employee Retention Tax Credit in the same quarter you used your PPP loan if you only used the funding in 1st month of the quarter?

    A: You must be careful that the same wages are not used for both the PPP forgiveness and the Employee Retention Tax Credit. If you already applied for forgiveness, we are awaiting further guidance on what people can do in that situation. If you have not applied for forgiveness yet, you should contact us or your CPA to make sure you coordinate both programs to maximize your relief.

    Q: How would you calculate the cost of Health Coverage if you are self-funded?

    A: There is an IRS FAQ that answers this question, see #68 in the link below. https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-amount-of-allocable-qualified-health-plan-expenses-faqs

    From the IRS, “An Eligible Employer who sponsors a self-insured group health plan may use any reasonable method to determine and allocate the health plan expenses, including (1) the COBRA applicable premium for the employee typically available from the administrator, or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan.

    If the Eligible Employer uses a reasonable actuarial method to determine the estimated annual expenses of the plan, then rules similar to the rules for insured plans are used to determine the amount of health plan expenses allocated to an employee. That is, the estimated annual expense is divided by the number of employees covered by the plan, and that amount is divided by the average number of work days during the year by the employees (treating days of paid leave as work days and any day on which an employee performs any work as work days). The resulting amount is the amount allocated to each day of qualified wages. Adjustments should be made for employee after-tax contributions.”

    Q: Is the government order to shut down a necessary condition for getting the Employee Retention Tax Credit?

    A: The eligibility requirements for the Employee Retention Tax Credit is for a trade or business that experienced a full or partial shutdown of their operation because of governmental orders or a significant decline in gross receipts

    Q: Is the Employee Retention Tax Credit a credit applied against payroll taxes?

    A: You could receive immediate access to the credit by reducing your employment tax deposits.

    Q: If you were subject to a government shutdown during a certain time period in 2020, are you still restricted by the quarterly revenue returning to 80% of the prior year or can you claim the credit for the entire time period?

    A: There are 2 different ways to qualify.  If you qualify due to the government shut down, then the gross receipts do not matter.   However, if you only qualify for the Employee Retention Tax Credit with the government shutdown/limitation, then you are only eligible during the shutdown period.   If you received any PPP money, you cannot use the PPP money to fund the payroll and still get the credit.  However, wages paid not using the PPP funds would qualify.

    Q: Are the gross receipts based on an accrual or tax basis?

    A: Gross receipts are most likely based on a tax return basis if you have a book.

    Q: Can you take the Employee Retention Tax Credit if you experienced no reduction in revenue, but you have been restricted by government shutdown orders in 2021?

    A: If you meet one of the two different criteria points for eligibility.

    1. Significant decline in gross receipts (which you mention you do not have) or;
    2. Full or partial shutdown of business due to government orders. You would want to double check your shutdown meets the criteria.

    Q: Are wages paid by an employer to employees who are related individuals considered qualified wages?

    A: No. Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the “Code”), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has of any of the following relationships to the employee’s employer who is an individual:

    • A child or a descendant of a child;
    • A brother, sister, stepbrother, or stepsister;
    • The father or mother, or an ancestor of either;
    • A stepfather or stepmother;
    • A niece or nephew;
    • An aunt or uncle;
    • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

    In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50% of the capital and profits interests in the entity.

    If the Eligible Employer is an estate or trust, then a related individual includes a grantor, beneficiary, or fiduciary of the estate or trust, or any person that bears a relationship described above with an individual who is a grantor, beneficiary, or fiduciary of the estate or trust.

    Q: I have 50 employees that qualify for the 5,000 per employee in 2020, meaning 50% of 10K annually.  The credit is 250,000. Is this taxable income to my entity in 2020?

    A: Your payroll expense on your 2020 income tax return would be decreased due to the Employee Retention Tax Credit of $250,000 that you would receive from your 2020 amended 941 returns.   For example, if your payroll tax expense account was 1,000,000 before the credit, it would be $750,000 after the credit.

    Q: For the year 2020, our payroll vendor has made the tax deposits. Therefore, can we still apply for the Employee Retention Tax Credit if we are qualified?

    A: You should still be able to take advantage of the Employee Retention Tax Credit. The payroll company should be able to amend your prior payroll tax returns. Then, you would have a credit for taxes paid in and that credit would be carried into your 2021 payroll tax filings. If your payroll company is not helpful or can’t answer your questions feel free to reach back out to us as our sister company, Abacus Payroll, has been involved with this already.

    Q: Can you use 4th quarter 2020 gross receipts to qualify for 1st quarter 2021 credit?

    A: To see if you qualify, you have to compare two corresponding quarters. You can also substitute for the immediately preceding calendar quarter. For example, for 2021, you can elect to compare the fourth quarter of 2020 to the fourth quarter of 2019. If there is evidence of a 20% or more decline in revenue, you will qualify for the first quarter of 2021. Another option is to wait until the first quarter of 2021 is over and compare that quarter to the first quarter of 2019, in the event that there is a 20% or more decline in revenue between them.

    Q: Would my Workers Comp premium be based on the lower amount of 750,000 versus the 1 million before the Employee Retention Tax Credit?

    A: The Employee Retention Tax Credit is just a reduction of payroll taxes you must pay into the government. It should not change the wages the premium would be calculated on but check with your insurer.

    Q: Does President Biden’s proposed tax plans include extending the Employee Retention Tax Credit?

    A: At this current moment, no. However the plans are still in flux and not yet finalized.
    *Note: This was the answer when this webinar was recorded on 1/28/21. New legislation passed in March 2021 has extended the ERC to December 31, 2021 to include the third and fourth quarters.

    Q: Does my PPP period have to be 8 or 24 weeks, or can I designate it?

    A: You may pick any covered period between 8 and 24 weeks in order to maximize your Paycheck Protection Program and the Employee Retention Tax Credit for 2020. Visit our COVID-19 Resource Center

     

    Employee Retention Tax Credit: Next Steps

    Are you looking for more information about the Employee Retention Tax Credit? You can watch the recording of our Breakfast Briefing webinar on this topic here.

    Alloy Silverstein Accountants and Advisors are here for you. We are happy to answer any further questions you may have about the Employee Retention Tax Credit, PPP loan, Loan forgiveness, and more. Please submit your question to solutions@alloysilverstein.com and we will get back to you as soon as possible. In the meantime, our COVID-19 Resource Center provides an abundance of information to help your business get through these times and come out stronger.

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