The ERC Refund Process: Refund Steps and Timeframes
You have likely heard about the most extensive financial rescue plan in U.S. history. The Employee Retention Credit is a payroll tax refund small businesses can receive thanks to a $2.2 trillion package providing relief from losses due to COVID-19.
If you have already submitted your application for the ERC refund, you may want a professional to analyze your documentation. They can verify you are receiving everything you are entitled to.
Requirements and qualifying factors underwent numerous changes. You may now be able to claim additional funds. If you are waiting for your refund, keep reading to learn about an IRS backlog and refund timeframe.
For those of you that have not applied, there is still time. We will share how to submit your application for employee retention credit in 2022.
Determine Your Qualification Amount
Complete an online questionnaire to learn how much your business qualifies to receive. ERC Smart will walk you through a series of questions to determine your eligibility. The process is simple; click on the appropriate answers to:
- If your business shows a reduction in gross receipts in 2020 in comparison to 2019
- If your business shows a decrease in gross receipts in 2021 in comparison to 2019
- Whether your business was the subject of a COVID-19 government shutdown
- Whether you are an essential business
- If you are receiving a PPP loan
- The number of W2s your company issued in 2020
- The number of W2s our company issued in 2021
You will then need to provide your name, job title, phone number, email address, the name of your company, and website address, plus the startup date of your business. After submitting your information, you will receive an answer in five minutes or less.
Before submission of a claim for an IRS ERTC refund, you need to gather all the documentation that proves to the government your company meets refund requirements. The following records must be available for uploading:
- Monthly payroll ledgers
- Monthly group healthcare statements
- PPP1 loan forgiveness application (Form 3508)
- PPP2 loan forgiveness application (Form 3508EZ)
- Profit and loss statements for every quarter you are claiming plus the same quarter in 2019
- IRS Forms 941
Refund periods are all of 2020 and the first three quarters of 2021. You will need to file amendments for each quarter you are claiming.
Eligible Employee Counts
Businesses with 100 or more full-time employees during the 2019 calendar year meet the qualification level to claim ERC for 2020. You may only claim wages paid to employees not working due to COVID-19 shutdowns or a decline in receipts.
You may claim wages up to the amount the employee would receive if working an equivalent period immediately before the shutdown. $10,000 is the maximum allowable wage for each employee per quarter.
Businesses with less than 100 full-time employees in 2019 may claim all full-time employees, regardless of whether or not they were able to continue working. The company may claim up to $10,000 for each employee every quarter.
Those filing claims for the 2021 year may apply if the business has 500 or fewer employees. For businesses of this size, the benefit is only available for employees not working during a decline in business operations or shutdown period.
What Designates Full-Time Work?
A person averaging at least 30 hours of work per week during 2019 qualifies as a full-time employee pursuant to 26 USC § 4980H(C)(4). Determine your average by taking the number of full-time employees on business records each month during 2019 and dividing by 12. The answer is your average employee count.
Requirements differ if you were not in business during 2019. Contact an ERC professional for help in calculating your refund.
You may qualify using any compensation or wages subject to FICA taxes. Compensation includes health plan expenses the business pays on behalf of employees.
The payroll dates must fall between March 12, 2020, and January 1, 2021, for employees not working. The reason for not working must be due to COVID-19 causing a decline in business or government shutdowns.
The qualifying employee must receive a minimum of $600 in wages during each quarter you claim. It is important to review the requirements for each year due to various factors and refund amounts.
Do Tips Count?
When calculating wage eligibility, hospitality companies and restaurants may include the tips their employees receive, meeting the following criteria:
- Tips from customers must exceed $20 per month
- You can receive ERTC and §45B credit for the same wages
The qualifying tip wage adjustment is available retroactively for both 2020 and 2021 payroll taxes.
Calculation Special Notes
If you only meet the qualifications for ERC in one or two quarters, try to use wages you pay in other quarters during a PPP loan period to satisfy that loan.
Determination on double-dipping your benefits is made using the application for your PPP loan. You cannot amend PPP loan forgiveness applications.
You can claim an ERC rebate for wages not on your PPP loan. If you submit $500,000 in payroll costs on your PPP loan forgiveness loan and receive a $300,000 PPP loan, you can use the additional $200,000 in payroll costs for your ERC calculations. Information regarding this option is in IRS Notice 2021-20.
PPP loans do not allow for the accrual of wages occurring during the loan period. Employee Retention Credit is for wages you pay during a quarter. Additional wages that accrue during a PPP period that pay out after the PPP period may enhance your ERC refund.
The ERC uses aggregated gross receipts. This means if you have several businesses, you may be able to qualify for each company.
There are some circumstances where this may also disqualify you from receiving benefits. You will want to have an ERC expert assist you in analyzing your qualification to avoid an IRS audit.
Deadlines for Claims and Amendments
Changes in qualifications mean that if at the time of your original Form 941 filing you did not meet ERTC qualifications, that quarter may qualify now. When ERC became active, businesses could not claim Payroll Protection Plan loans and ERC for the same quarter.
That restriction underwent a reversal, and businesses may now claim both PPP and ERTC. You may now receive both for the same quarter, but you must ensure you do not claim the same payroll wages on ERC that you list on your PPP loan.
Claiming ERC on your original Form 941 filing is the fastest way to receive your refund. The time frame at the initiation of the program was 3-6 months.
Businesses claiming ERC by filing a Form 941-X amendment can anticipate an ERTC processing time of ten months or more. You may receive a letter from the IRS informing you of an overpayment on your account, and your refund check will arrive about a week later. Your refund check will show the quarter covering the refund and any interest you are receiving on your refund.
If you do not receive a refund letter but receive a request for additional information, contact your ERC specialist to assist you in resolving the matter.
ERC Smart Analysis
ERC Smart makes filing amendments to obtain your payroll tax refund easy. Our team of dedicated ERC staff maintains their focus on payroll taxes, and we will work directly with your payroll company.
After you gather the above information, use our portal to upload your raw payroll data, PPP loan documents, and 941 returns. Our ERC experts will calculate the exact value of your credit to determine what you can receive from the IRS.
Once our analysis is complete, we will prepare Form 941-X for every quarter, amending your payroll returns. We will help you file the returns. You will receive your refund check in the mail.
Where Is My ERC Refund?
Because many businesses are filing retroactively for their employee retention credit or filing amendments to their original filings, the IRS is experiencing a larger number of returns to process, causing delays.
According to the June 22, 2022, report of Erin M. Collins, National Taxpayer Advocate, the IRS has a backlog of 21.3 million returns to process. Businesses need to anticipate a waiting period of 10 months or more to receive their IRS ERTC refund.
IRS Backlog and Penalties
To help manage the massive number of returns, the IRS plans to hire a total of 10,000 workers, 5,000 in 2022 and 5,000 in 2023. Unfortunately, as of May, the agency still does not have even 2,500 new hires on staff, so the outlook isn’t good.
Progress is being made, and as of June 10, 2022, the IRS reports 11 million pending tax returns. They hope to catch up on the backlog by the end of the year.
Businesses filing for ERC retroactively may have an increase in their income tax liability. With the IRS backlog on processing refunds, many companies owe the tax increase before receiving their refund. If the business cannot make payments on time because of a refund delay, it may encounter penalties.
IRS news release 2022-89 reminds businesses that they may be eligible to receive relief from penalties if they can show just cause and not willful neglect for their failure to pay. If this is a situation your business faces, you can file for administrative relief using the IRS First Time Penalty Abatement Program.
To qualify for this waiver, the business must show:
- There have been no penalties for the past three years
- All filing of returns is current or proper extensions have been filed
- You have paid or arranged to pay any tax you owe
Filing for your payroll tax refund retroactively and the IRS not being able to process the return in a timely manner is a reasonable cause for late payment.
Check Your ERC Status
If you are waiting to receive your refund and want to find out the status, you can call the IRS at (877) 777-4778. There is a shortage of operators, so your wait time will be at least 30-60 minutes.
At this point, you need to plan for a 9-12 months wait for your payroll refund. Processing of returns happens in the order of receipt.
That means reimbursements from 2020 process before 2021 returns. They are also processing all Form 941 before they process Form 941-X.
When you speak with an agent, explain that you are inquiring about your ERC status, specifically your 941-X for all relevant quarters. Before providing you with any information, the agent will verify your identity, including your full name, relationship to the company, postal address, kind of return filed (940-X, 1120, 1120-S, 1065, etc.), federal identification number, and the year of formation for the business.
Because of the known backlog in processing times, the IRS requests that employers not call them regarding their refunds. It is preferable to visit the IRS website to review COVID-19 updates.
Going to the IRS “Where’s My Refund?” page gives you a better chance of getting some answers. To use the online request, you will need your social security number, filing status, and the exact whole dollar amount of the refund.
This tool is reportedly available 24 hours after the IRS receives an electronic return or four weeks following the mail date of a paper return. There is also an IRS amended return status checker.
Possible Reenactment of ERC
There are currently two legislative bills attempting to reinstate the ERC for the fourth quarter of the 2021 tax season. Both bills are currently in committee.
The last action on House of Representatives bill H.R. 6161 shows the bill referred to the House Committee on Ways and Means in December. The bill has 110 co-sponsors.
The Senate bill has been read twice and is now in committee. If your business is suffering from the impact of COVID-19, you may want to visit the pages for Senate Bill S-3625 and H.R. 6161. Both pages have a list of links on the right, including one for leaving feedback about the bill with your legislator.
Request Your ERC Refund Now
Tax season is fast approaching. If you file for your ERC refund during tax time, you will likely have to wait longer for your funds to arrive.
ERC Smart experts will analyze your records and get you the funds your business needs to thrive. Beat the tax season rush by claiming your refund now.