During the initial impact of the pandemic, the federal government developed several stimulus programs for COVID-19. These programs aim to assist businesses through credits for coronavirus payroll taxes.
The programs and numerous amendments cause confusion, with many employers missing out on the opportunity to participate. Only 8% of business owners in 2020 and 10% of businesses in 2021 filed for ERTC.
You can still file for the COVID payroll tax credit in 2022. To learn if you qualify, access the ERC Today online questionnaire to begin the application process. Keep reading to learn how to determine your business eligibility and what documents you need to file a claim.
ERC vs. ERTC
You will hear two terms when filing tax returns for COVID payroll relief. The Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) are the same credit under different names.
They are the creation of the Coronavirus Aid Relief and Economic Security (CARES) Act, which became law in March 2020. The goal is to assist businesses in keeping employees on their payroll.
Covid Relief Programs
Since the initial Coronavirus Aid, Relief and Economic Security (CARES) Act of March 2020, numerous updates and changes have made determining the rules complex. At the time of introduction, the CARES Act provisions only allow businesses to receive ERTC or a Payroll Protection Program (PPP) loan, but not both.
In addition to those two plans, other options are also available. If reviewing this makes your head spin and you’re not sure about the best course of action for your business, contact ERT Today. They will ensure you apply for all coronavirus payroll tax relief you qualify for.
Coronavirus Response and Relief Supplemental Appropriations Act (CCDF)
This act provides $10 billion in supplements for the Child Care and Development Fund. The purpose is to assist states in responding to the coronavirus.
All states, territories, and tribes must submit reports regarding how the funding will be spent by September 30, 2022.
American Rescue Plan
The American Rescue Plan extends tax benefits for small businesses, including ERC and Paid Leave Credit. The new deadline for ERC is December 2021, allowing companies to offset payroll tax liabilities by a maximum of $7,000 per employee per quarter.
The Paid Leave Credit assists small and midsize businesses by providing paid leave to employees taking time off due to quarantine, caregiving, or illness.
Economic Injury Disaster Loan (EIDL)
The EIDL gives small businesses the ability to receive grants for financial relief due to the pandemic. Small businesses receiving approval receive $1,000 per employee up to $10,000 total.
The program ending date is December 31, 2021, or when no more funds are available under the Consolidated Appropriations Act of 2021.
Qualifying businesses must be in a low-income community and have a 30% reduction in gross receipts for any 8-week period between March 2, 2020, and December 31, 2021. Only prior applicants qualify for the new coronavirus grant.
Paycheck Protection Program (PPP)
This plan provides loans to small businesses so they can keep employees on their payroll during the COVID-19 shutdowns. The plan closed applications on August 8, 2020, then began accepting applications after additional funds became available through the Consolidated Appropriations Act. The final closing date is March 31, 2021.
Businesses may deduct expenses paid using PPP funds from federal taxes. Loans are forgivable if the business meets specific conditions. The forgiven loans are not taxable income.
The PPP Flexibility act became effective June 5, 2020, making PPP loans more flexible. It extends the time businesses have to spend the loan and extends the application deadline to March 31, 2021.
Payroll Tax Deferral
This allows employers to defer the business portion of Social Security Tax deposits from March 27, 2020, through December 31, 2020. The deferred taxes are to be shown on Form 941.
To repay the deferred amount, 50% was due on December 31, 2021. The remaining 50% is due by December 31, 2022.
Employee Retention Tax Credit (ERTC)
This plan is part of the CARES Act. Businesses receiving a PPP loan did not meet the initial eligibility requirements. The 2021 consolidated Appropriations Act amends this rule, allowing companies to claim benefits from both programs.
Eligibility includes fully or partially suspended business operations during 2020 due to COVID-19. Also eligible are businesses with a 50% decline in gross receipts of the same calendar quarter in 2019.
The Consolidated Appropriations Act 2021 extends the ending date for the ERTC to July 1, 2021. It changes the credit available to 70% of wages up to $10,000 per employee per quarter in 2020 and increases the credit to up to $14,000 per employee per quarter in 2021.
The credit is made against the employer’s share of Social Security taxes. It is fully refundable, and the claim is made on Form 941.
Coronavirus Payroll Taxes in 2022
The numerous amendments and changes left many businesses cautious about risking an error. Instead of taking advantage of the programs, they skipped the opportunity to obtain tax relief.
Misunderstandings about qualifications and fear of making a mistake mean many businesses still miss out on this opportunity. There is also confusion over qualifying for the credit if your business receives a Personal Payroll Protection (PPP) loan. Then there is the change from a retroactive deadline of January 1, 2022, to October 1, 2021.
The law allows businesses to do a look-back of up to three (3) years and amend their Form 940 by filing Form 940-X. The deadline for filing ERC is October 1, 2021. For recovery start-up businesses, the deadline is January 1, 2022.
How Does the ERC Work?
The employee retention credit is a refundable tax credit available to businesses meeting qualification requirements. This includes an employee cap and qualifying wages. You must first prove that your business suffers from the negative impact of COVID-19 by meeting one or more of these factors:
You qualify for relief if your business suffers from a partial or full shutdown during 2020 or 2021. Shutdown factors include limitations due to commerce, the inability to travel, restriction of group meetings, or reduction in gross receipts.
The qualification is per quarter. Your business may qualify for one quarter but not the next.
The decline in revenue for 2020 is at least 50% lower than the same quarter in 2019. To qualify in 2021, you need a revenue decline of at least 20% from the same quarter in 2019.
A recovery startup business can meet qualification requirements for wages they pay from June 30, 2021, to January 1, 2022. They may also qualify for earlier quarters by filing Form 940-X.
How to Apply
To apply retroactively for your ERC, you must complete the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X. You submit this form with your quarterly federal tax return.
To prove eligibility, you must submit documents showing a decline in revenue between the quarter you are claiming in 2020 or 2021 and that same quarter in 2019. You will also need to provide:
- Location of your business
- How many employees are eligible
- Your quarterly payroll tax returns
- If receiving a paycheck protection program (PPP) loan for that quarter, detail on wages under the PPP program
- Employee wages detail, including date
- Summary of your lines of business
You also need information on employees not working due to a reduced work schedule, including wages they received. If your company was not open in 2019, you may use corresponding quarters in 2020 to show your reduction in revenue to qualify for ERTC.
Get answers to your ERC questions by contacting a reputable company specializing in this unique area of tax law.
To receive your coronavirus payroll taxes credit, the employee must have qualifying wage payments between March 12, 2020, and January 1, 2021. For a business experiencing a qualifying reduction in revenue, all wages qualify.
The ERC refund is made in the form of a grant, with a return of up to $26,000 per employee; the average is $11,000. This varies depending on health care, wages, and other personal expenses employers pay. The credit is available to all businesses regardless of their industry or size.
You must retain the employee during the period, and they must receive wages of at least $600 during that quarter. Total qualifying wages include the sum of the salary, hourly pay, commissions, and other forms of compensation, such as health insurance.
Sole proprietors, government entities, and self-employed persons are not eligible for ERC. If these people have staff on a payroll, they may qualify for wages paid to staff.
All companies with 100 or fewer employees are eligible for the coronavirus tax credit. If a company has more than 100 employees, they may only claim full-time employees they pay but are not working due to shutdowns or a reduction in gross receipts.
Wages You Cannot Claim
In addition to sole proprietors, government entities, and self-employed not being able to claim themselves, employers may not claim the same employee for both the Work Opportunity Tax Credit and ERTC for the same tax period. Claims for the same wages under ERTC and the employer credit section 45S of the Family and Medical Leave Act (FMLA) are also not allowable.
If your company receives first and second draw PPP loans, you may also claim the ERTC. The exception is you may not claim the ERTC for the same wages you show for PPP forgiveness. You may not claim the same payroll costs on two different relief plans.
Calculating the Employee Retention Credit
The credit you may receive is up to 50% of the qualifying wages you pay to each eligible employee, up to a maximum of $10,000 per employee per quarter. Calculate your credit by determining the number of eligible employees in a particular quarter and the total wages you paid to those employees.
You then take the total amount of wages for that quarter and divide it in half. That is your credit payroll tax credit for 2022. If any employee receives more than $10,000 per quarter, you can only calculate your refund on the $10,000 for that person.
For example, if you have three employees receiving wages of $5,000, $7,000, and $15,000 for the quarter, you add the qualifying amount of those wages together ($5,000 + $7,000 + $10,000 = $22,000). You then multiply the $22,000 in qualifying wages by 50% to receive a refund of $11,000 for that quarter.
Is ERC Taxable Income?
The credit payroll tax credit in 2022 is not a taxable income for employees. There are no additional taxes on any wages ERC covers. The ERTC is a refund of money the government owes you.
As an employer, the ERC is a business expense, which you may use to offset taxes you owe. Employers filing retroactively may need to also file for penalty relief for ERC claims.
IRS Penalty Relief for ERC Claims
The IRS issued notice IR-2022-89 on April 18, 2022, regarding additional income taxes businesses owe but are unable to pay because of a delay in receiving their ERTC refund. There is a processing backlog in the IRS for adjusted employment tax returns. This includes Form 941-X, which businesses file retroactively to claim their employee retention credit.
The IRS requires employers to reduce their income tax deduction for ERTC-qualified wages by the amount of their ERTC for the year wages were paid. When you claim your COVID payroll tax credit 2022 retroactively by amending your Form 941, you reduce your deduction for qualifying wages and increase your income tax liability.
The IRS backlog is causing businesses to be required to pay their tax liability increase before receiving their ERTC refund. Tax relief for employers who suffer penalties for failing to pay taxes may be available. This is possible by showing you have a reasonable cause for not paying off taxes.
You may also qualify for penalty relief by using the IRS First Time Penalty Abatement Program. This relief is available to employers who:
- Have no previous return filings or have no penalties from the prior three tax years
- Meet all filing requirements of current returns or proper filing of extensions
- Payments of taxes are complete or arrangements made to pay the tax due
The main factor in receiving penalty relief is your attempt to comply with tax law, but paying your tax is impossible due to circumstances beyond your control.
Apply for Coronavirus Payroll Taxes Relief Today
To get your questions answered and begin your employee retention credit application for coronavirus payroll taxes relief, contact ERC Today. We provide a free consultation and are 100% IRS compliant. Don’t hesitate to contact us today!