Every employer, both for profit and non-profit, should determine if they are eligible for “employee retention tax credits” (ERC). AccuPay has been working with employers and their CPA/consulting firms to educate them about ERC tax credits, and ultimately to claim the ERC’s as offsets to 941 tax deposits and/or by filing/amending quarterly IRS 941 payroll tax returns. Employee retention tax credits can be claimed even if the employer does not have “financial need,” unlike the PPP loan “economic necessity test.” Interestingly, one of the two ERC eligibility tests does not even mention COVID or pandemic in its legal drafting. And the “icing on the cake” is that the CAA legislation signed on December 27, 2020 mandates the IRS to conduct a “public awareness campaign” to educate employers about the employee retention tax credits——SO AccuPay is helping the IRS promote ERC tax credits in this educational PayDay email!!
I RECALL ERC WAS AROUND IN 2020—-SO WHY IS IT A BIG DEAL NOW?
Employee retention tax credits were initially enacted into law in the Cares Act, on March 27, 2020. HOWEVER—AND THIS IS A HUGE HOWEVER—-the original ERC tax credit was not available to any employer who obtained a Paycheck Protection Program (PPP) loan—so most employers did not pay much attention to the ERC tax credits since they correctly applied for a “first draw” PPP loan. AccuPay did claim some ERC tax credits for employers who did not qualify originally for the PPP loans (501c6 orgs like trade associations, Chambers, etc.) Most employers with less than 500 employees applied for the PPP loan and the ERC credit was not a consideration——-UNTIL NOW!!—The new stimulus law, Consolidated Appropriations Act (CAA) signed on December 27, 2020, changed eligibility for the ERC tax credits such that employers who received a PPP loan could ALSO calculate and claim employee retention tax credits—and the CAA made the ERC tax credits available to PPP loan borrowers retroactive to year 2020, and extended the ERC tax credits to June 30, 2021. Our understanding is that the ERC credits may be further extended by a new stimulus package being worked on by the Biden administration——So employers need to determine IF they qualify for employee retention tax credits!
HOW DOES AN EMPLOYER QUALIFY FOR ERC TAX CREDITS?
An employer qualifies for the ERC tax credits, for both 2020 and also 2021, IF it meets one of 2 tests (either or):
An employer has it’s normal operations “partially or totally suspended” by a government order (federal, state, local) which impacts commerce, travel or group meetings. Many restaurants have had “government order restrictions” from March of 2020 through the current day, which impact the manner in which they conduct their operations. Many healthcare practices were “shut down” by government order, except for emergencies, during 2020. The list goes on and on, and the IRS does have some examples of “suspensions” in their writings about fact patterns.
An employer qualifies for employee retention tax credits based on “qualifying wages” paid to employees during the shut-down period. If the shut-down period was during 2020, the method of claiming the ERC tax credit is by filing an amended payroll tax return Form 941 for the quarters in which the employer is claiming the ERC tax credits. AccuPay has been working with our employer-clients and their CPA/consulting firms to claim the retroactive ERC tax credits for calendar quarters during 2020.
The other “non-COVID test” for the ERC is IF the employer experienced a “significant decline” in their gross receipts during a calendar quarter in 2020 or the first 6 months of 2021, they qualify for the ERC tax credits based on qualifying wages paid during the quarter. For year 2020, an employer must have a calendar quarter in which gross receipts declined by more than 50% as compared to the identical quarter in 2019 (for many employers, this would be Q2 in the early pandemic days). For the first 2 quarters in 2021, the revenue decline must only be 20% or more as compared to the identical quarter in year 2019. Employers can also “substitute” the 2021 quarter of revenues by the “immediately preceding quarter,” say Q4 of 2020 compared to Q4 of 2019, to qualify for the Q1 2021 employee retention tax credit. AccuPay is already offsetting Q1 2021 IRS tax deposits by Q1 2021 ERC tax credits for our employer-clients who have calculated a 20%+ revenue decline in Q4 of 2020 as compared to Q4 of 2019—those employers already know they qualify for Q1 of 2021 by using Q4 of 2020 to Q4 of 2019—over 20% decline!
DO YOU QUALIFY FOR EMPLOYEE RETENTION TAX CREDITS BASED ON EITHER OF THE ABOVE 2 TESTS?—HOW TO CALCULATE THE CREDIT
Employers who meet one or both of the above 2 ERC eligibility criteria must then determine how to calculate the amount of their ERC tax credit. CAVEAT—I will be discussing the ERC as it applies to employers with 100 or less FTE employees (based on ACA FTE definitions) for 2020 (based on 2019 FTE calculations) and for employers with 500 or less FTE employees for year 2021. Special rules limit the ERC credit amount for employers larger than those levels—but do notice that the more beneficial “larger employer” ERC calculations include employers with up to 500 employees for year 2021—-the ERC tax credits for 2021 will apply to larger employers and generally will produce higher dollar amounts of ERC tax credits in 2021 than 2020 (although we have seen many “6 figure” ERC credits for year 2020!).
The ERC tax credits are a percentage of “qualified wages” and “qualified healthcare costs” paid by the employer during the ERC timeframe which applies to their fact pattern (a defined period of time for government ordered “suspensions” and calendar quarters for employers who experienced significant gross receipt declines). The ERC tax credit for 2020 is 50% of the first $10,000 of qualified wages/healthcare costs paid during the ERC timeframe, calculated for the entire year of 2020. The ERC tax credit for 2021 is 70% of the first $10,000 of wages/healthcare costs paid during the quarter—–and “per quarter”—-so the maximum ERC tax credit per employee during 2021 is $14,000 (based on $7K per quarter for Q1 and Q2)
A HUGE “BUT/HOWEVER”—–COORDINATING THE ERC TAX CREDIT WAGES/HEALTHCARE COSTS WITH PAYROLL COSTS FOR PPP LOAN FORGIVENESS
An employer can not use the same dollar of wages and healthcare costs for BOTH ERC tax credit purposes and PPP loan forgiveness—–THIS “NO DOUBLE-DIPPING” APPLIES TO BOTH 2020/2021 ERC CREDITS AND FIRST AND SECOND DRAW PPP LOANS. What this means is that an employer must “sort” wage/healthcare costs between those which are being used for PPP loan forgiveness purposes and those which will be used for ERC purposes. THE MOST VALUABLE USE OF PAYROLL IS FOR PPP LOAN FORGIVENESS SINCE THAT IS DOLLAR FOR DOLLAR AND ALSO NOT TAXABLE. However, many employers spent far more in payroll costs (to include wages/healthcare which would also qualify for the ERC credits) during their 24 week “covered/spending period” for PPP loan forgiveness than what was actually needed to totally forgive their PPP loan. The PPP loan amount was and still is based on 8 weeks of payroll and other eligible PPP costs, and yet an employer generally can choose to use all PPP eligible costs for up to 24 weeks after they receive their PPP loan proceeds—–so many employers spend twice what is needed in payroll costs alone in forgiveness of their PPP loan (not to mention that other costs can be used for PPP loan forgiveness—rent, utilities, mortgage interest and some new categories added by the CAA law.)
SOME PLANNING IDEAS ON OPTIMIZING THE ERC CREDIT WHILE STILL ATTAINING TOTAL PPP LOAN FORGIVENESS—-NO DOUBLE DIPPING!!
PLANNING STEP 1—-WHICH COSTS CAN ONLY BE USED FOR PPP LOAN FORGIVENESS AND DO NOT QUALIFY FOR ERC CREDITS?—ADD THEM UP/60% MUST BE PAYROLL COSTS
PPP loan forgiveness can be attained by spending certain types of costs during the 24 week PPP covered period which do NOT QUALIFY for the ERC tax credits. It would seem that planning to maximize your ERC and still attain total PPP loan forgiveness would include using PPP eligible costs which do not qualify for ERC tax credits. We also know that at least 60% of your covered period spending must be for “payroll costs” to completely forgive your PPP loan.
Here is a list (not exhaustive) of costs which qualify for PPP loan forgiveness but do not qualify for ERC tax credits:
- Rental of facilities and equipment during the 24 week period—–those costs will reduce the amount needed for “payroll costs” and “free up” more wages for ERC tax credit purposes
- Utilities
- Mortgage interest—includes interest on equipment loans or in effect any business interest secured by property—-be careful of special rules on related party rent
- The “new cost categories” added by the CAA on 12/27/20—most software costs, COVID property damage repairs, COVID remodeling, and certain “supplier” costs for purchase agreements entered into pre pandemic (restaurant orders produce right before pandemic, which spoils due to pandemic shut-down)
The above costs will reduce the amount of “payroll costs” you need for PPP loan forgiveness, BUT not below the 60% amount of your PPP loan which must be spent on “payroll costs.”
Below are some “payroll costs” which can be counted towards PPP loan forgiveness to meet the 60% requirement which are not “qualifying wages” for ERC tax credit purposes:
- SUTA and other “state/local tax assessments pertaining to payroll-—-all of those costs apply towards PPP loan forgiveness, not the ERC tax credit
- Retirement funding—-employer portion only can be counted for PPP, but does not qualify for the ERC credit—all retirement funding apply towards PPP, not ERC
- Employee group life and disability premiums (employer cost) apply as “payroll costs” for PPP, but do not produce any ERC credit
- Compensation paid to pastors/clergy “count” as eligible PPP payroll costs BUT do not qualify for ERC tax credit purposes (ERC wages must be FICA wages)
- Compensation/wages paid to a more than 50% owner-employee and their “relatives” (defined by the IRS rather broadly)—-wages paid to a “more than 50% owner-employee, or their spouse” do not qualify for the ERC tax credit BUT do count up to $20,833 per owner-employee for PPP loan forgiveness (general rule). Wages paid to “most relatives” also count for PPP loan forgiveness but do not count for ERC tax credit purpose (Be careful on special rules regarding owners’ compensation—talk to your CPA about them!)
- Wages paid to employees who earn more than $100K per year are “capped” for PPP loan forgiveness purposes such that only 24/52 X $100K, or $46,154 of an employee’s wages “count” as payroll costs for PPP loan purposes——NOTE—-FOR ERC PURPOSES, ONLY UP TO $10K PER YEAR/2020 OR QUARTER/2021 ARE ELIGIBLE FOR THE ERC CREDIT—-So it would seem that, as a general planning rule, that the first $10K of wages paid to an employee could be used for ERC purposes with the excess up to $46,154 being used for PPP loan purposes.
HOWEVER, PLANNING AND SPREADSHEETS MUST ALSO TAKE INTO ACCOUNT THE TIMEFRAMES WHICH APPLY FOR “COST SORTING” OF PAYROLL COSTS BETWEEN ERC AND PPP.
It would seem that “reported tips” by tipped employees of “food and beverage establishments” qualify for BOTH ERC and PPP purposes, since they are compensation subject to FICA tax.
PLANNING STEP 2—-CALCULATE YOUR MAXIMUM EMPLOYEE RETENTION TAX CREDIT FOR THE TIMEFRAME YOU ARE ERC QUALIFIED
Step 1 identified costs which “count” towards PPP loan forgiveness which do not also qualify for the ERC tax credit. An employer would use ALL of those costs which were paid/incurred during their 24 week PPP covered period, for PPP loan forgiveness. The employer could then subtract the amount of those non-ERC eligible costs from their PPP loan, plus ALSO SUBTRACT out any FTE headcount reductions/payrate reductions (Ask your CPA about those.) The remaining figure would seem to be the amount of “wages and healthcare costs” which qualify for the ERC which would need to be allocated/sorted towards the PPP loan forgiveness (Remember, PPP loan forgiveness is a dollar for dollar savings and PPP loan forgiveness is not taxable—-so PPP loan forgiveness is the highest value and an employer must meet the 60% payroll costs threshold to totally forgive their PPP loan.)
Calculate your qualified wages/qualified healthcare costs for ERC tax credit purposes for the timeframe you are eligible for the ERC tax credit (shut-down defined period or calendar quarter). In addition to detailing the qualified ERC costs by quarter, ALSO separate your ERC qualifying costs into 2 timeframes—-costs which are included in your PPP covered period and those which are before or after your 24 week covered period.
PLANNING STEP 3—-ALLOCATING QUALIFYING WAGES/HEALTHCARE COSTS PAID WITHIN YOUR PPP COVERED PERIOD AS NEEDED TO ATTAIN TOTAL PPP LOAN FORGIVENESS
Step #1 calculates how much additional payroll costs you need to attain 100% PPP loan forgiveness. Step #2 sorted your qualifying wages/healthcare costs into 2 timeframes—ERC qualifying costs during your PPP covered period and those outside your covered period. You would then “allocate/pull/sort” enough of your ERC qualifying costs to meet the amount needed to attain total PPP loan forgiveness. The remaining qualified wages/healthcare costs would then be used to claim the ERC tax credit since you have used all of the needed ERC costs to attain PPP loan forgiveness.
FINAL COMMENTS/THOUGHTS ABOUT OPTIMIZING YOUR ERC TAX CREDITS AND PPP LOAN FORGIVENESS
Since the ERC and PPP loan forgiveness “overlap” as to types of costs and even timeframes, you need to hire your CPA/consultant to make these calculations. AccuPay’s role is educating our clients and preparing and filing the IRS 941 ERC tax credit claims. We will ask you/your advisor for the amounts, per quarter, of wages and healthcare costs (separately) which qualify for the ERC. We will use those figures to claim your ERC credits on original 2021 payroll tax returns or amended 941 forms for 2020 (quarter by quarter unless the IRS releases guidance that we can lump all of 2020 together on a single refund claim.)
It is best that you NOT apply for loan forgiveness UNTIL you have made these ERC calculations (as to the amount of payroll NOT NEEDED on your PPP loan forgiveness form). The CPA Society has asked the IRS to clarify/provide guidance for employers who have already submitted PPP loan forgiveness applications, and simply reported 24 weeks worth of payroll, and no other PPP eligible costs, on their loan forgiveness form. Can the employer now go back and “amend/revise” their loan forgiveness form to only use the amount of payroll costs actually needed to attain PPP loan forgiveness? In effect, get a “do-over”? The IRS has yet to provide guidance on this question by the CPA Society. If you have not applied for forgiveness of your PPP loan, “best practice” is to wait until you have determined if you are eligible for the ERC credit. An employer has 10 months from the end of their 24 week periods in which to apply for PPP loan forgiveness.
Retro 2020 amended 941s are needed (until further guidance from the IRS) to claim 2020 ERC tax credits—quarter by quarter. We hope that a simpler method/procedure will be forthcoming from the IRS to lump all 2020 quarters into one form instead of filing separate quarterly amended returns. (We just started filing amended 2020 941 forms for some clients who wanted to file now). Last year the IRS actually paid interest on ERC claims at a 3% APR rate—-it will be interesting to see if they will again do so for the huge # of ERC refund claims they will now be receiving!
FINAL NOTE TO CPA’S/CONSULTANTS/FINANCIAL ADVISORS——-this PayDay is my attempt to “think through” what to me seems to be the strategy to optimizing ERC tax credits while concurrently attaining total PPP loan forgiveness. I consider this as “items to consider” in the planning process. I will be grateful for any suggestions, comments or corrections to any aspect of this PayDay. All of us at AccuPay love to collaborate with fellow professionals on ways to benefit our mutual clients and colleagues—-you can reach me at larry@accupay.com
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.