Employee Retention Tax Credit: Debunking Common Misconceptions
Did you know that only eight percent of business owners utilized the employee retention tax credit (ERTC) in 2020?
The tax credit can feel daunting to apply for, but it does not have to be. There’s a lot of misinformation out there, but we’re here to help you debunk it all.
Read on to learn more about some of the most common misconceptions and the truth about what really happens.
You Don’t Qualify for ERTC if Your Business Received a PPP Loan
When this tax credit was first implemented, employers could not qualify for both the Paycheck Protection Program and the Employment Retention Tax Credit. However, those limitations were removed once the Consolidation Appropriations Act took effect in 2021, meaning you’re allowed to be eligible for both.
So, if you received a PPP loan in 2021 but are interested in the ERTC tax credit in 2022, you should still apply.
Here’s the Catch
What you need to know is that you cannot use the same wages for both PPP debt forgiveness and ERTC eligibility calculations
Increased Revenue Results in Disqualification
As an employer, it’s easy to assume that if your business saw growth, you do not qualify for the ERTC, but you would be incorrect. There are various ways to qualify, including a gross reduction alongside the pandemic’s effect on your business. There are a few specific instances this could occur in:
- Your business hours were altered during the pandemic
- Trades experienced partial or total suspension because of a lockdown
- Your company experienced a partial shutdown
- Social distancing affected your business capacity
- You experienced supply and shipment issues
- Your meetings and/or business travels were affected
There are still exceptions to be made within these rules, but if you experienced anything similar to this, it’s a good idea to take a look at your options.
You Don’t Have a Significant Decline in Gross Receipts
For ERTC purposes, any eligible employer must be able to prove that either their business was fully or partially suspended or it experienced a significant decline in gross receipts.
You do not have to have both to qualify, only one.
Your Company Is an Essential Business, So You Don’t Qualify
Even essential businesses felt the effects of the pandemic. Maybe your vendors were unable able to deliver supplies, or maybe you needed to visit a client’s job site, but shutdown orders kept you from getting the task done.
It might seem far-fetched, but if you were stuck in situations similar to these, it’s at least worth checking into.
Only Businesses With Less Than 500 Employees Qualify
The employee count restriction is only based on full-time equivalent (FTE) employees. That’s why it’s important to take every individual story into account rather than just conducting a basic headcount. Your FTE count might recognize less than 500 employees as a result of your count, while your business employs 800 people.
Also, if any of your clients paid an employee not to work, then the count restriction does not count towards those individuals.
You Have Over 500 Employees for the PPP, So It’s the Same for ERTC
The answer to this is debatable.
The rules that govern headcount for PPP loans fall under SBA guidelines. Under those guidelines, you have to calculate the average number of people employed for each pay period over the last 12 months your business was open. Any person on the payroll has to be included in this count, regardless of hours worked or whether they’re a temporary employee.
So, you had to include both part-time and full-time employees in that count.
For the ERTC, these numbers fall under the Internal Revenue Code. As we’ve already said, these numbers are based on full-time employee numbers, not part-time.
The ERTC purposes, the employees you include in your count, must have an average of at least 30 hours of service per wek or 130 hours of service in a month. Furthermore, you can combine part-time employees with other part-time employees for the month in order to create a full-time equivalent.
It can get confusing, but this means businesses can have fewer employees on ERTC than they did for PPP.
Being Shut Down Qualifies You for ERTC
Not all shutdowns are the same when it concerns the ERTC. Throughout 2020 and 2021, some businesses closed because of government mandates while others closed for safety reasons. If a professional were to look at your eligibility, only the first scenario would count.
It’s important to not overlook the line that says, “…due to a government order” when you’re confirming your eligibility. Just because your business closed during this time period doesn’t mean you are automatically qualified — it must be tied to a government mandate.
What Counts?
You’re likely to find a lot of differing opinions surrounding this subject, but you can find the exact examples on page 25 of this document issued by the IRS. Here are a few examples they give:
- Order from a city’s mayor mandating all non-essential businesses close for a certain period
- Order from a local official establishing a curfew that impacts your business’s operating hours
- Order from a local health department mandating the closure of your business for disinfecting and cleaning
So — unless you were specifically told your business had to shut down — you’re not eligible for the ERTC.
Supplier Shutdowns Mean You’re Qualified
This statement is clever, but it’s incorrect.
When your supplier shuts down, it’s easy to assume that you can qualify for the ERTC. It’s somewhat true, but there are specific things you need to consider first:
- The supplier shutdown was government-mandated
- You’re not able to obtain anything form a different supplier
- You’re only eligible during the time the supplier was shut down
So, while the statement is somewhat true, it’s important to recognize the very specific qualifications you have to meet before you assume your eligibility.
Documenting Your Eligibility Is Unnecessary
It can be tempting to skip over your need to keep track of everything. The IRS has a lot of cases to track, why would they stop long enough to pay attention to mine?
The reality is that when audit time rolls around, you’re going to need to be able to prove your eligibility. If you do not , you could be in big trouble. That means record keeping is going to become your best friend.
The ERTC is a large tax credit, and you can expect the IRS to conduct a hefty amount of audits in the coming years as a result.
Your Business Didn’t Pay Income Taxes in 2020, So You’re Ineligible
It’s important to note that the credit is based on payroll taxes, not income tax. So, if you paid your employment taxes in 2020, but left out income tax, then you’re still eligible for the ERTC.
PEOs Don’t Qualify
If you’re a professional employer organization, you can still qualify for the ERTC.
Furthermore, if you utilize a PEO, CPEO, or another third-party service provider, then you’re still eligible to claim the credit through that third-party payer. The PEO/CPEO would just have to file an amended Form 941 and Schedule R for the quarters that your business was impacted.
Recordkeeping
In this case, documentation is going to be done by you and the company filing on your behalf. Yes, it’s easier to trust that your PEO will have everything taken care of, but in this situation, it’s better to be safe than sorry.
If the IRS requests this documentation from you at a later point and you cannot come up with the documents, you both are going to be held liable for any employment taxes that become due as a result.
You Have to Wait for Your Form 941 to File Before Requesting
This is quite possibly one of the most common misconceptions. However, since ERTC is a payroll credit rather than an income tax credit, you do not need wait and you can also receive the funds quicker.
Furthermore, if your business needs the money sooner rather than later, you should be adjusting your federal employment tax deposits by the amount of ERTC you can reasonably expect. If you wait to claim the ERTC on your Form 941, the IRS might take up to four to six months to fully process the refund.
How to Determine ERTC Eligibility
Now that you’ve debunked a few of the most common misconceptions, how can you determine whether or not you’re eligible? Here are a few of the most important requirements.
Companies That Qualify
Any sole proprietor, LLC, S-Corporation, and C-Corporation is eligible, but they have to meet additional criteria to qualify. Those companies that have less than 500 full-time equivalent employees as of December 2020 can apply for the ERTC. In the previous version, only those with less than 100 employees could apply.
In order to claim this credit, your business has to show a 20 percent decrease in gross receipts in any quarter of 2020 when compared to the same quarter in 2019.
How Much Is the Credit?
There’s a lot of misinformation floating around about how much the credit is for, but we have the real numbers.
The credit itself is worth 70 percent of qualified wages for up to $5,000 in 2020 and up to $21,000 in 2021 for a total of $26,000 per employee.
Which Payroll Is Considered for Qualifying Wages?
It’s crucial to understand what qualifying wages are when you’re applying for the ERTC. It’s more than just your employee’s gross pay, and it includes both full-time and part-time employees’ payroll amounts.
Also, you’re allowed to add qualified health plan premiums or expenses that you paid on an employee’s behalf. This usually includes both the portion of health insurance cost paid by you (the employer) and the employee with pre-tax salary reduction contributions.
What is not included, however, are the amounts that your employee paid with after-tax contributions.
Should You Hire Professional Help?
When it comes to the ERTC, the entire process can be difficult to navigate. Sure, you might have a reasonable idea of what you should do. You might even have an expectation of the money you will receive, but that does not mean you are going to be correct in both instances.
A professional is going to know about every misconception, and they’re going to be able to help you work through them. Navigating the application process on your own can be bumpy, but having someone to help guide you through is a great way to ensure everything goes smoothly.
You’ll also know you’re protected in the event that things go wrong. Whether it’s an improper amount of funds or an IRS audit, you’ll be able to turn to whoever helped you for assistance. They’ll know exactly what’s expected, and they’ll be able to help things along without you receiving a penalty.
Unique Insight
They’ll also be able to provide unique insight into your situation. The IRS has things laid out pretty neatly, but that does not mean every business owner is going to be able to interpret the laws.
The right professional is going to be able to read these laws and help you understand what they mean for your business rather than other businesses that are in your situation.
Need an Employee Retention Tax Credit Professional?
Despite all the misconceptions surrounding the employee retention tax credit, it has the potential to help a lot of businesses, and it’s something that should be considered by every company that might need it. If you’re still not confident, you can always turn to an ERTC specialist.
Luckily, we’re here to help. Contact us today to get started.