Scroll to the bottom of this post for a link to the full webinar.
As I’ve mentioned in recent posts, one of the main sources of financial relief from the congressional legislation that was finally signed recently is that the Employee Retention Credit (ERC or ERTC) will now be available to businesses who also accepted Paycheck Protection Program (PPP) funds. Not only will eligible businesses be able to claim this moving forward, but they have an opportunity to “scoop up” payroll dollars from 2020 that would have been eligible had it not been for the PPP Loan.
As a reminder, this credit is available to business owners (regardless of size) whose operations have been fully or partially suspended by government order, or who have seen a drop in income of more than 50% compared to the same quarter in the previous year. The credit comprises 50% of up to $10,000 in wages to each employee paid by an eligible employer whose business has been financially impacted by COVID-19. The credit cannot be taken on wages that were paid for by PPP funds — but as long as there is no double-dipping, PPP recipients can claim other wages for the purpose of ERC. It is claimed as a reduction of payroll taxes on quarterly Form 941 (or a prepaid refund on Form 7200). The IRS updated the form on July 1, and a handy breakdown of the new lines can be found here.
Last week, I offered a webinar to members of my favorite professional bookkeeping group, and they have been kind enough to allow me to share the recording here at no charge. The purpose of the session was to explain the credit and the related challenges, and to brainstorm how we might move forward to calculate the totals and claim it for our eligible clients. Our conclusions have been enforced since then:
1. Identify which clients might qualify and make sure their books are up-to-date (even though we are still waiting on a lot of guidance — for example: what receipts are we looking at when we calculate a 50% drop in revenue? Does it include state and local emergency grants?)
Here is the Excel template I used in class to track client eligibility:
2. Reach out to the payroll companies to see what they will need to claim the credit;
3. The likelihood that this will all happen quickly enough to claim the 2020 ERC on the 4Q Form 941 is very slim; plan on filing amendments for Q2, Q3 and Q4 later.
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The newest Covid-19 financial relief package was finally signed, and one of the big features is that the Employee Retention Tax Credit (ERC or ERTC) was made available to many businesses that previously were not allowed to claim it, most notably those who accepted PPP loans.
To summarize the ERC: • 50% refundable payroll tax credit on qualified wages paid between 3/13/2020 and 12/31/2020 • Claimed on quarterly payroll tax Form 941 • Qualify for quarters with full or partial shutdown due to government order =OR= 50% decline in gross receipts from prior quarter • Maximum qualified wages of $10,000 per employee during tax year 2020 period • For employers with 100 or fewer employees, all wages paid are “qualified wages” (different rules for larger employers) • PPP loan recipients were previously ineligible
Changes retroactive to 3/13/2020: • PPP loan recipients can use the credit for wages not paid for with forgiven PPP loan proceeds (no overlap) • Group health plan expenses are considered qualified wages even if no other wages were paid to employee
And the reason for this post — the employer can elect to treat newly creditable wages as paid in the quarter that includes the date of enactment of the Act (4Q 2020) if employment tax returns for prior quarters were already filed prior to the enactment of the Act.
The ERC is also being extended and expanded — but that’s beyond the scope of this blog post. A quick summary of what’s to come: The credit availability is extended to wages paid through 6/30/2021 and the following changes will apply: • Credit rate increases from 50% to 70% • Maximum creditable wages increases to $10,000 per employee per quarter • For employers with 500 or fewer employees, all wages paid are qualified wages • Qualifying gross receipts decline from prior year quarter reduced to 20% instead of 50% – Employer can elect to compare to immediately preceding quarter – Employers not in existence for all or part of 2019 can use the credit
But the point here is that the old ERC is now available to any qualifying employers who had either a 50% reduction in gross revenue or were fully or partially shut down by government order — even if they received PPP funds. They just can’t double-dip on the payroll costs that were claimed for PPP forgiveness. And so for these employers, any remaining (non-PPP) payroll costs from 3/13-12/31/20 can now be claimed on the fourth-quarter payroll tax Form 941 and 50% of up to $10,000 per employee will be credited back to them. This is not small change for some employers!
The problem, of course, is that we have to act fast — the fourth-quarter 941 forms will be filed in a matter of a week or so, depending on your payroll company. They are all scrambling to find a way for us to report which wages are eligible… but in the meantime we need to get our clients ready.
The first step is to determine which clients are already taking the credit.
There are many fine payroll companies out there (actually, there aren’t), and Gusto is hands-down my favorite, and that of many of my colleagues. (And if you use my referral link you’ll get a $100 gift card when you run your first payroll by January 31. If you’re a bookkeeper or accountant wanting to switch your clients to Gusto, this referral link will get you a $500 gift card.)
So I’ve written up instructions with screen shots on how to look up which clients of yours using this system are already claiming the ERC. Once you know this, you can then 1) reach out to them to let them know they can now apply for the PPP, and 2) reach out to the ones who haven’t to let them know they might qualify.
Step One: log into your Gusto Accountant dashboard. Step Two: click on “Clients” in the upper-left to see a list of your clients. Step Three: you’ll need to click into each client and perform the following steps.
Click “Covid-19” in the upper-left.
Scroll past the new notice about the Consolidated Appropriations Act (see screenshot at top of blog post).
There are a bunch of blocks of info on the different programs for which the client might be eligible. Click the “Claim credit” button for the Employee Retention Tax Credit.
4. You will see one of two screens — either it will say “You’re currently receiving the employee retention tax credit” or it won’t.
This is what it looks like if your client is already receiving it:
And this is what it looks like if they’re not:
If they’re not, and you’ve determined that they qualify (50% reduction of gross revenues over the same quarter in the prior year =OR= full/partial shutdown by the government), then click the button at the bottom of the screen to claim the credit and you’ll come to this screen next.
You’ll need to know the quarter in which they became eligible and had wages that qualified for the credit.
Once gross revenues climb back up to 80% of what the same-quarter prior-year revenues were, the client ceases to qualify and must stop taking the credit.
Again, remember that this is to claim wages paid from 3/13-12/31/20 (that were not paid for with PPP funds) on your fourth-quarter payroll tax Form 941. We do not yet know how Gusto (or any of the other payroll companies) will process this information, but given how soon they will need to be filed, it’s essential that we get our clients ready as quickly as possible, and this is Step Two — finding out if they’re already claiming it or not.
(In case it’s not obvious: Step One is determining if they qualify. We’re going through all our clients’ QuickBooks files to review for a 50% drop in gross revenue and then reaching out to clients accordingly, after determining whether they have taken the ERC already or not.)
Good luck!
If this or any other posts on the website were useful to you, and your financial situation permits it, please consider contributing to my tip jar. This allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.
