AccuPay has been very active in helping our employer-clients obtain employee retention tax credits for both years 2020 and 2021. Employee Retention Tax credits were part of the CARES Act legislation which intended to help small to mid sized employers with emergency funds to weather the impact of the pandemic on both for profit and non-profit employers. However, when the ERC tax credits were first enacted into legislation they could not be used by any employer who also received a PPP loan, which we all know were extremely popular during 2020. On December 27, 2020, legislation was enacted which enabled employers who qualified for employee retention tax credits to apply for them even if they also had received a PPP loan. OUR EXPERIENCE IS THAT MANY EMPLOYERS WHO ARE ELIGIBLE FOR EMPLOYEE RETENTION TAX CREDITS HAVE NOT FILED FOR THEM SINCE THEY ARE SIMPLY NOT AWARE THEY QUALIFY FOR THEM. AccuPay has helped our clients obtain over $15 Million in ERC tax credits/IRS refunds and eligible employers still have plenty of time to claim the tax credits they are eligible for. Calculating the ERC tax credit can be complex, but the refundable amounts can be significant, and thus identifying if an employer is eligible is well worth the time/effort. Talk to your CPA firm about your eligibility for employee retention tax credits but also educate yourself about how they work. AccuPay’s website blog contains many articles we have written about employee retention tax credits, so you may wish to read our content for self-education.
Many employers have not filed for Employee Retention Tax Credits due to misinformation, or “myths,” about how the ERC tax credits work. Here are common ERC myths we have encountered:
MYTH #1 – I already got my PPP Loans, had them forgiven, so I do not qualify for Employee Retention Tax Credits—-NO!
Many employers qualify for employee retention credits even though they also received PPP loans (even if they got 2 PPP loans!). An employer cannot claim employee retention tax credits on the same dollars of wages used for the payroll portion of PPP loan forgiveness, BUT many/most employers had more payroll costs than needed during their 24 week PPP loan “covered period” to forgive the PPP loan. These “excess wages” not needed for PPP loan forgiveness are what can be used to qualify for ERC tax credits from the IRS. The calculations required to “sort” wages between ERC credits and PPP loan forgiveness can be complex, BUT the tax credits generated can be enormous—-SO do it!
MYTH #2 –My revenues/gross receipts did not decline in 2020 or 2021 as compared to 2019, so I do not qualify——NO!
Eligibility for employee retention tax credits is an “either-or” test—–Either your gross receipts/revenues declined by greater than 50% for a 2020 quarter compared to the same quarter in 2019 (for 2021, the revenue decline only needs to be over 20%), OR—-A “big OR”—–your normal operations were partially suspended due to a government order due to COVID, which impacted “commerce, meetings or travel.” The most common example we have seen pertains to restaurants. Restaurants in Indiana had various COVID government ordered restrictions as to dine-in capacity, social distancing, so forth and so on. Some restaurants had increased sales during 2020 and into 2021 in spite of the government restrictions, as they relied on carryout and drive-thrus to replace inside dining sales. Virtually all restaurants qualify for ERC tax credits based on government ordered restrictions on their normal operations EVEN THOUGH their gross revenues did not decline at all, let alone 20 to 50% or more. Many retailers also had government ordered restrictions, as did gyms, dentists, styling salons, etc—-The IRS has also agreed that IF your operations were restricted due to supply chain orders on your vendors, you may qualify in that manner. Restrictions on events, travel, meeting sizes (churches) are other types of ERC qualifying restrictions which impacted your “normal” (based on 2019) operations could make you eligible for significant IRS refunds from ERC tax credits.
MYTH #3 – I was an essential business which was not required to shut down and therefore, not entitled to ERC Tax Credits —–NO!
Many “essential businesses” qualify for ERC tax credits based on the 2 “either-or” eligibility criteria—-a significant decline in gross revenues during a single quarter in 2020 or 2021 (which may be totally unrelated to COVID) OR government orders which imposed partial restrictions on your normal operations. Churches were deemed “essential” early on, BUT were limited as to the number of people who could attend a church service—not shut down but limited by government order as to meeting size. Some businesses were not shut down BUT had government orders which required that they limit the number of people at their business at one time, or had orders which required they “clean/sanitize” frequently, resulting in less sales. The “restrictions” on operations must have been ordered by a government entity (state, county, city), not a voluntary choice by the employer—–MANY ESSENTIAL BUSINESSES/EMPLOYERS HAVE HAD ERC TAX CREDIT CLAIMS.
MYTH #4 – I do not have taxes to offset with a credit since I am a non-profit or have operating losses—–NO!
The Employee Retention Tax Credit is called a “refundable tax credit,” which means that the IRS sends you a refund check even if you do not have sufficient tax liability to use the “tax credit”—-A church or other non-profit employer can claim the ERC tax credit and receive refund checks from the IRS even though it does not pay income taxes—-ERC tax credits are claimed on IRS 941 payroll tax forms, which often generate IRS refund checks which far exceed the payroll tax obligations/costs of the employer. ERC is called a “tax credit” but it should be viewed as an IRS refund—-Make sure your address on your amended 941X form used to file the ERC claim is correct since the IRS will mail the check to the address on your return.
MYTH #5 – My tax accountant/CPA has already taken care of the ERC credit with my annual tax returns—-NO!
I heard this from a restaurant owner who told me “no need to discuss the ERC tax credit since my CPA already claimed it on my annual tax returns”—--Employee retention tax credits are claimed by filing amended Form 941X payroll tax forms, which are not part of your annual business or personal tax returns. DO NOT ASSUME THAT YOU GOT THE EMPLOYEE RETENTION TAX CREDIT AS PART OF YOUR ANNUAL TAX RETURN FILINGS. Ask your CPA if you are eligible for the ERC tax credit and whether he/she has filed for it—-if your accountant says you are not eligible based on the lack of the 20-50% quarterly revenue declines, ask your accountant if you are eligible based on government ordered restrictions which have impacted your commerce, meetings or travel—–the “math test” eligibility is “black and white,” whereas the eligibility test based on government orders takes more time to consider. Some employers qualify for some 2020 and 2021 quarters based on revenue declines for some quarters and government ordered COVID restrictions for other quarters—-it is OK to “mix and match” the “either-or” eligibility tests for the employee retention tax credit.
MYTH #6 – I did not begin my business operations until after the pandemic started so I am not eligible for ERC Tax Credits—NO!
The legislation actually defines a “recovery startup business” as an employer who commenced operations after February 15, 2020, and whose annualized gross receipts for the months or year ending June 30, 2021 did not exceed $1 million. These “new employers” are eligible for a special ERC tax credit for Q3 and Q4 of 2021, EVEN THOUGH THEY DO NOT MEET EITHER OF THE 2 TESTS FOR REGULAR ERC TAX CREDITS. In essence, the law is providing Q3 and Q4 2021 tax credits/IRS refunds as a “reward” for an employer choosing to start an organization during the pandemic. This special type of “business” also applies to non-profit organizations in addition to for profit businesses. A new employer claims this special type of ERC by “checking a box” on the payroll tax Form 941 that they are a “recovery startup business.” The tax credit/IRS refund is capped at $50,000 per quarter for the last 2 quarters of 2021. AccuPay has already “found” some of these start-up employers among our clients, and they were thrilled!—--ARE YOU AN EMPLOYER WHO STARTED YOUR OPERATIONS AFTER 2/15/20? (NOTE—tax credit does not apply to owners and their relatives—so no credit for a “1 owner S corporation.”)
CONCLUSION—–If you believe you are ERC eligible, we strongly encourage you to contact your CPA firm to help you with what are generally complex calculations—but which often produce substantial tax refunds from the IRS. Check out our ERC Quiz to help you determine your eligibility.
AccuPay’s role is educating clients and others on ERC/PPP concepts, and actually filing the payroll tax returns required to claim the ERC tax credits. We prefer to work with CPA firms as to calculations needed to claim the tax credits. We are happy to answer your questions about your eligibility for ERC tax credits.
This PayDay is for educational purposes only and does not constitute tax and/or legal advice. Any links to external resources are for educational purposes only. AccuPay is not affiliated with nor receives any renumeration from any outside sources. Please consult with your tax and/or legal advisor before applying any suggestions made here or through external links.