Many clients have been asking for information on the Employee Retention Tax Credit (ERTC). This post will address this credit program. We apologize for the length, but there is much complex information to share. In addition, we will be hosting two identical webinars later this week so that we can review the details and give you an opportunity to ask questions via online chat. We will answer all the questions we can during the allotted time and then answer the rest via email afterwards.
The Consolidated Appropriations Act (CAA) of 2021, which became law on December 27, 2020, makes significant changes to the Employee Retention Tax Credits (ERTC) available under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act). These changes are designed to increase access to this credit for many more employers and to increase the amounts available. It also extends the credit availability period to June 30, 2021. The most significant changes are detailed below. We will also explain how Southwestern Payroll is prepared to assist you with obtaining this credit.
Furthermore, on March 11, 2021, President Biden signed the American Rescue Plan Act (ARPA) of 2021. This act made additional changes that are beneficial to employers, including extending the ERTC.
The first major change is that employers who obtained a PPP loan are now eligible for the credit. Previously, having received a PPP loan excluded employers from this credit. However, you may not claim any credit for wages paid using proceeds from the PPP loan. These wages must be excluded from the credit calculation.
The next big change is the revenue threshold used to qualify. Previously, to claim the credit for a given quarter, you had to have experienced a 50% reduction in gross revenues for that quarter compared to the same quarter in 2019. Beginning January 1, 2021, the revenue reduction level has been changed to 20% compared to the same quarter in 2019 (employers that did not exist in 2019 can use the corresponding 2020 quarter). Employers that have had their business shut down for a period of time due to COVID-19 related government orders remain eligible.
Another significant change to the ERTC to benefit employers is the amount available per employee. Previously, employers could receive a credit equal to 50% of an employee’s wages between March 27, 2020 and December 31, 2020 for a maximum credit of $5,000 per employee. Now, as a result of the CAA, for the first and second quarters of 2021, the credit has been raised to 70% of employee wages with a maximum credit of $7,000 per employee per quarter. Employer-paid healthcare expenses can also be used as wages for this calculation as needed.
The most recent act, the ARPA, extends the ERTC through the end of 2021 with the same quarterly credit increases. This means the maximum credit is $28,000 per employee for the year.
Additionally, the ARPA created new eligibility for Recovery Start Up Businesses that commenced operations after February 15, 2020 and have revenue of less than $1,000,000. These companies are eligible for credits of up to $50,000 per quarter. There is no gross receipts reduction requirement.
Remember that wages paid as FFCRA sick or family pay are not eligible for the credit. Nor are wages paid out of PPP loan funds eligible for credit.
SO, WHAT NOW?
Because of the novelty, complexity, and variety of the recent payroll-related legislation, and the time required for software developers, the IRS, employers, and payroll processors to digest the information, there has been a delay in developing good strategies to deal with the requirements. No doubt we will have to continue to adapt to further changes before we are through.
There are several ways to receive the credit. One option is to reduce tax deposits with each payroll. This requires setting up special codes in the payroll system. Another is to file a form 7200 prior to filing quarterly reports and request advance payment of these credits. They would then be reflected on the 941. A third method is to calculate the ERTC amount and reflect it as an overpayment on the 941 and receive a regular refund.
One issue that complicates matters is that employers may not be certain that they will qualify for a given quarter until late in that quarter. Remember for 2021 you must have at least a 20% decrease in gross revenue over the same quarter in 2019. If a business is not certain they will qualify, then taking the credits in real time could be risky if business picks up late in the quarter and the threshold is not met. This makes the reduction in payroll deposits method less desirable for some businesses who are close to the limits.
Another issue is that, for most employers that qualify, the amount of the credit for each payroll will exceed the total 941 deposits on the payroll. On average, 941 deposits on a payroll are about 20%-25% of the gross payroll wages. This means a 50% credit would be far more than the credit that can be taken on a given payroll. The software developers have created ways to track these deficits and report them on the 941 as over payments, but nobody has had a chance to test this in real time because the quarter is not complete.
As a result of these factors, we are taking one approach for the first quarter of 2021 and will open other options for subsequent quarters. For the first quarter, we will use the approach of filing forms 7200 prior to sending in the 941 for the quarter. This should result in a faster turnaround of the funds to our clients. We will then reflect this amount, and any refunds in excess of the total deposits available on the 941 by adjusting the amounts filled in by the payroll systems. This will require manual intervention by our staff prior to filing these returns.
For subsequent quarters, at your request, we can enable the payroll tax deposit reduction feature in payroll, if you are certain you will qualify. At the end of the quarter we would request remaining credits be sent as a refund to you directly.
We can also still file form 7200 for future quarters for those who do not elect the per- payroll reduction.
Additionally, we can file 941-Xs for those employers who are unable to meet the necessary deadlines.
We will send out additional information separately on configuring the required payroll codes to take the per payroll credit.
HOW CAN WE HELP?
Depending on the needs of your company, the process will vary from client to client. You can ask us to handle everything, do almost everything yourself, or something in between.
The first step is actually up to you. Determining if you are eligible for the credit is the crucial first step in the process. To be eligible, you must have had a 20% decrease in gross revenue compared to the same quarter in 2019 or have had your business interrupted due to a government order related to COVID-19. You are also eligible if you were a Recovery Start Up as mentioned above. If your business was not operating in the relevant quarter in 2019, you can use the quarter in 2020. Once you have determined that you are eligible and want to participate, you can decide how to proceed.
The next step is to determine how much credit you are eligible for. Currently, we do not have an automated way to determine this calculation. There are a number of factors that complicate that development. We are hopeful that our software providers will be releasing some assistance. At the moment, we can run payroll reports and put the data into a spread sheet to perform the calculations. Performing these calculations can be time-consuming or fairly straight forward depending on your circumstances. Remember that you must account for PPP-loan-covered payroll costs and any FFCRA-related pay and exclude those amounts.
For the first quarter, we will then submit the form 7200 and then file the 941 form. If we are unable to complete the 7200 in time, we can still request a refund on the 941 or a 941-X.
It is crucial that you provide copies of any form 7200 you already filed so we can reflect it on the 941.
WHAT WILL THIS COST FOR PREPARATION?
If you would like our assistance with various parts of this process, our fees will be as outlined below. Also, we will prepare a simple agreement specifying our role and responsibilities for your signature.
If you would like us to fully handle the process after you determine eligibility, including calculating the credit amount and filing all needed forms, our fee will be 10% of the credit amount. The minimum fee is $500 per company. We will need to know about any PPP funds used to pay employees during the quarter. FFCRA should be tracked through our existing features. Also, depending on your wage base, we may need information about employer-paid health insurance as well. This can be included in the calculation.
If you will handle the calculation of the ERTC amount, and simply need us to file form 7200 (which you can do) or manipulate the 941 correctly then our fee will be $150 per form. 941-Xs for ERTC purposes will also be $150.
For quarters 2 through 4, for employers that want to use the per payroll reduction features, there will be a $150 setup fee and $10 charge per payroll for the ongoing service. There will also be a $150 fee for correcting the 941 each quarter.
No doubt you will have at least some questions before you decide how to proceed. Obviously, at this point, time is of the essence. As I mentioned earlier, in order to avoid being overwhelmed with emails and calls, in the next day or two we will send out invitations to a webinar where we will recap this information and have a way for you to ask questions. We will answer as many as we can in the time allotted and then answer the rest in a follow up email. We will have the webinar scheduled for Thursday and Friday of this week (two sessions).
Form 7200 is available here.
Instructions for form 7200 are here.
Southwestern Payroll Service