Claiming ERTC for eligible payroll expenses

Overview of ERTC and Its Financial Impact

Employee Retention Tax Credit (ERTC) | Definition & Eligibility

“Employee Retention Tax Credit (ERTC) | Definition & Eligibility” from financestrategists.com and used with no modifications.

Financial buffers like the Employee Retention Tax Credit (ERTC) have played a significant role in protecting businesses from the economic challenges triggered by the COVID-19 pandemic. The ERTC, established under the Infrastructure Investment and Jobs Act 2021, provides financial assistance to businesses by offering tax credits for eligible wages paid to their employees during the pandemic.

Understanding the ERTC: A Lifeline for Businesses

The ERTC stands out as a financial aid offering in the sea of stimulus programs because of its unique structuring—it’s not a loan, but a dollar-for-dollar reduction in the employer portion of Social Security taxes. By targeting payroll costs, a significant expense for most businesses, the ERTC helps businesses retain their workforce even in challenging economic circumstances.

Due to the high application rates that led to an influx of around 540,000 claims in the last 90 days of 2023, the IRS decided to temporarily halt the processing of new ERTC claims. Despite the temporary pause, businesses are urged not to pull back on levering this credit as the pause will be lifted in 2024.

From the inception of ERTC until its pause in September 14, 2023, a significant 3.6 million claims have been submitted by businesses nationwide. But as we’ll soon discuss, not all business types or payroll costs qualify for the ERC—being aware of the specifics can help ensure your claim’s successful processing.

The Role of ERTC in Employee Retention During the Pandemic

When COVID-19 took the entire world by storm, businesses across industries viewed layoffs as a quick fix to stabilize their financials. However, lay-offs come with their own set of complications, including rehiring costs and potential loss of skilled workers. The ERTC was designed to provide a significant buffer against these concerns. Also, it was continually expanded and adjusted through legislation, such as the American Rescue Plan (ARP) and the Infrastructure Investment and Jobs Act, to cope with the changing needs of businesses.

The tax credit is based on eligible payroll costs until September 30, 2021, for many businesses. However, for those defined as “recovery startup businesses,” wage payments eligible for the ERTC were extended till December 31, 2021. Aside from supporting businesses in their effort to preserve jobs, the ERTC also played an instrumental role in reducing the financial burden triggered by the pandemic.

Most importantly, the ERTC also provided relief for some businesses that had earlier applied for a Paycheck Protection Program (PPP) loan but found their funds insufficient. A notable change from the IRS allowed borrowing businesses that qualified under new provisions to claim ERC as well.

Qualifying for ERTC: Eligibility Requirements

American Rescue Plan Act: Business Tax Impacts — Delta Wealth Advisors

“American Rescue Plan Act: Business Tax Impacts — Delta Wealth Advisors” from deltawealthadvisors.com and used with no modifications.

As with most federal assistance programs, the ERTC comes with a list of eligibility requirements that businesses must satisfy. However, these are not cast in stone—businesses should carry out a detailed assessment to determine eligibility.

Essential Criteria for ERTC Eligibility

The primary criteria for qualifying under the ERTC are:

  • The business must have been in operation after February 15, 2020.

  • The business must have experienced either a full or partial suspension of their operations due to COVID-19 or a significant decline in gross receipts (generally a 50% decline compared to corresponding 2019 quarters).

  • The business made qualified wages (including certain health expenses) to their employees.

These requirements may seem simple, but the fine-print can often create confusion. However, bear in mind that certain aggregates of businesses are treated as a single employer under the ERC laws, and the definition of a “significant decline in gross receipts” varies between 2020 and 2021.

Large vs. small employer rules also have an impact on the amount of credit a business can claim under ERTC. The guidelines define larger employers (those having over 100 full-time employees in 2019) as being eligible only for wages paid to employees for the period they were not providing services.

On the other hand, small employers (with 100 or fewer full-time employees in 2019) can claim the credit for all employee wages, regardless of whether the employee is providing services. It’s worth remembering that the threshold above increased to 500 employees for the period beginning in January 1, 2021.

Another essential aspect to remember is that business owners, their family members, and shareholders owning more than 50% of the business are not considered employees for the purposes of ERTC.

The Role of PPP Loans in ERTC Eligibility

Prior to the Consolidated Appropriations Act of 2021, businesses that received a PPP loan were not eligible to claim the ERTC. However, legislation changes in December 2020 allowed PPP borrowers to claim the credit retroactively.

It’s important to remember that any wages paid with forgiven PPP loans are not eligible for ERTC. Therefore, businesses must be cautious in identifying wages that qualify for the ERTC while ensuring that they are not included for PPP loan forgiveness.

This may seem a bit complex and overwhelming. However, it’s worth remembering that PPP loans and the ERTC are designed to work together and help businesses maximize their financial relief during the pandemic. Therefore, understanding how they intersect is crucial for businesses to make the most of the aid offered. Seeking professional assistance can make this process significantly easier and ensure compliance.

ERTC Claim Submission: Step-by-Step Guide

Filing for the ERTC involves documenting eligible expenses, calculating the credit, and correctly compiling Form 941 or Form 941-X. Let’s walk through the process step-by-step:

Filing ERTC Claims: Detailed Procedure

The application process for ERTC involves the following steps:

  1. Review and determine eligibility criteria based on IRS guidelines.

  2. Identify and document eligible expenses, including qualified health plan expenses and qualified wages.

  3. Calculate the ERTC by applying the appropriate percentage to eligible expenses (up to 70% in 2021).

  4. Report the ERTC on the quarterly federal tax return (Form 941), or claim retroactively using Form 941-X.

  5. Follow up on the claim status and respond to any IRS inquiries.

Businesses should maintain documentation regarding their eligibility for the ERTC and retain this information for at least four years.

Essential Documents Required for ERTC Claim

When preparing to claim the ERTC, maintain the following documentation:

  • Records of business operation suspension or decline in gross receipts.

  • Records of employment taxes reported on Form 941, including qualified wages and qualified health plan expenses.

  • Any other relevant financial documents.

This documentation is vital to substantiate eligibility for the ERTC and to respond to potential IRS inquiries or audits.

Navigating the IRS Moratorium on New ERTC Claims

In response to a 15% surge in ERTC claims, the IRS has temporarily paused processing new applications. This halt, announced on September 14, 2023, is projected to last until at least 2024.

Understanding the Consequences of the ERTC Claim Pause

This moratorium has significant implications. Any claims received after September 14, 2023, will be processed more slowly. Businesses should be prepared for this delay and plan accordingly. However, even with the pause, businesses should continue to document eligible expenses and prepare to claim the ERTC as soon as the pause on applications is lifted.

As the IRS is still processing claims that they received before the announcement, businesses should not be discouraged from applying for the ERTC. This aid, when processed, could provide significant financial relief.

Withdrawal of Pending ERTC claims: Process and Implications

Withdrawal of an ERTC claim is also an important aspect to consider. Businesses that have applied for ERTC but no longer qualify due to changes in circumstances can withdraw their pending claims.

Withdrawal instructions are specific and include submitting a signed statement to the IRS that clearly identifies the claimant’s name, address, and taxpayer identification number. Additionally, a clear declaration stating the withdrawal should be included, specifying the quarter for which the claim is being withdrawn and the date the initial claim was made.

Avoiding Pitfalls: ERTC Scams and Investigations

As with any government funding program, there is the unfortunate reality of scams related to the ERTC. This risk, combined with the complexity of the various guidelines, makes it critical for businesses to tread carefully when applying for this credit.

Recognizing and Guarding against ERTC Scams

Businesses must remain vigilant and report any misinformation to the IRS in a timely manner. This could include fraudulent communication purporting to be from the IRS or any suspicious emails.

Remember, the IRS will not initiate contact with taxpayers by email, text messages, or social media to request personal or financial information. In addition, any unsolicited emails that appear to be from the IRS or an organization closely linked to the IRS should be reported to phishing@irs.gov.

The Ramifications of IRS ERTC Investigations

Additionally, the IRS—and its Criminal Investigation Division more specifically—holds the power to investigate questionable ERTC claims. As of note, there have been 252 investigations into $2.8 million of ERTC claims.

Beyond just the financial penalties, being entangled in a fraud investigation can lead to reputational harm, making it crucial for businesses to act in good faith when submitting their claims and keep comprehensive documentation supporting their application.

Claiming the ERTC Retroactively: Guidelines and Limitations

Fortunately for businesses, the ERTC can be claimed retroactively. However, understanding how the process works and its associated deadlines is critical.

Amending Returns to Claim ERTC: Deadlines and Tips

Businesses needing to claim the ERTC retroactively need to file Form 941-X for amended payroll tax reports. The deadline for submitting form 941X for the 2020 941 payroll tax filings is April 15, 2024, and for the 2021 filings, it’s April 15, 2025.

However, it’s key to remember that the IRS has a backlog in processing 941X returns, and this could cause significant delays in the receipt of funds.

Challenges of Retroactive ERTC Claims: Delays and Solutions

Retroactive claims can face several other challenges as well. For example, correctly identifying and calculating eligible expenses across multiple accounting periods can be complex.

Professional tax or accounting help can be invaluable here to ensure accurate determining, tracking, and claiming expenses across different time frames. Particularly for businesses with borrowing loans, understanding the overlap between PPP loan payments and wage payments eligible for ERTC is crucial.

Role of Paychex ERTC Service in Claim Processing

Paychex, one of the leaders in payroll processing, offers a specific service to help businesses claim the ERTC. This professional assistance can significantly streamline the claim submission process and maximize the likelihood of success.

How Paychex ERTC Service Simplifies Claim Submission

Paychex ERTC Service interfaces directly with the IRS systems, allowing businesses to conveniently process their claims in a timely and accurate manner. This service simplifies the overwhelming process and ensures compliance, reducing the burden on businesses and allowing them to focus their resources elsewhere.

Working With Paychex for Efficient ERTC Claiming

However, it’s important to note that Paychex ERTC Service cannot assist with claiming until the temporary suspension of the ERTC program is lifted. This highlights the importance of the upcoming lifting of the pause, allowing services like the one offered by Paychex to help businesses start claiming the credit that they are entitled to.

Conclusion: Securing Relief through ERTC Amid Challenges

The ERTC offers valuable financial assistance to various businesses that have been affected by the pandemic. Despite the current pause on claims, businesses should prepare to leverage this tax credit as soon as processing resumes.

Benefits and Potential Hurdles of the ERTC Program

Eligible businesses could gain significant benefit from the dollar-for-dollar reduction in their tax bill. However, there are potential hurdles as well, particularly regarding identifying qualifying wages and navigating the interaction between the ERTC and PPP loans.

Seeking professional advice can simplify this complexity and increase the likelihood of successfully claiming the credit, providing businesses with a much-needed financial cushion in these uncertain times.

Future Possibilities for ERTC Claiming Post-Moratorium

Post-moratorium, it’s expected that there will be a rush of businesses eager to leverage the ERTC. Businesses should be prepared for potential processing delays but should also have all documentation and calculations ready for when processing resumes.

Remember, the ERTC is not simply a financial aid program—it’s an opportunity to strengthen your business and retain your workforce amid turbulent times.

Frequently Asked Questions

  • What is the ERTC and who is eligible? ERTC stands for Employee Retention Tax Credit. This federal program provides revenue protection to eligible businesses that were significantly affected by the pandemic by offering a credit on their payroll taxes.

  • How does the moratorium impact new ERTC claims? The IRS has initiated a pause on processing new ERTC claims until at least 2024. This pause is a response to a surge in claim submissions.

  • How can I submit a retroactive ERTC claim efficiently? Businesses needing to claim ERTC retroactively can file Form 941-X for prior payroll tax periods. However, do anticipate potential processing delays.

  • What role does Paychex ERTC Service play in claim submission? Paychex ERTC Service assists businesses with the ERTC claim submission process, simplifying a potentially complex and time-consuming process.

  • Can I still claim ERTC if I’ve secured a PPP loan? Initially, businesses that received a PPP loan were not eligible for the ERTC, however, legislation in December 2020 has allowed such businesses to claim the credit retroactively. Excellent record-keeping is vital. Any wages paid with a forgiven PPP loan are not eligible for the ERTC.

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