Tag Archives: payroll tax

COVID-19 Financial Relief, Education, IRS

Don’t Believe The Hype: IRS Provides Update on Employee Retention Credit (ERC) Processing

July 15, 2024 Nancy McClelland Leave a comment

Thanks yet again, and as always, to Lisa Simpson from the AICPA Town Hall for her regular updates on what’s going on with Employee Retention Credit processing at the IRS. I can trust this team to make sure I’m getting the latest information, free from rumors and gossip, and that I’m able to both quell my clients’ concerns and also manage their expectations.

I had just been hearing some rumblings in one of my professional associations — someone had said, “seems inevitable that anyone who filed an ERC claim after September 2023 will need to file a lawsuit to get the claim paid,” and went on to suggest that it would be a great opportunity for a law firm, and wanted to know if we had referrals in this space.

First off, it made me nervous — our remaining ERC claims, all for deserving small business and non-profit clients of a colleague, worked really hard to make sure we had what we needed to submit their claims by January 31st, 2024, since there was pending legislation that might retroactively end the program after that date. They all were informed that it might be a year or more before they received the money, given the IRS moratorium — but certainly none of us expected to line the pockets of an attorney in order to get the claims paid out. And in fact, the claims were mostly small enough that my guess is most lawyers wouldn’t bother with them.

Secondly… it made me suspicious. On what basis was this guy saying a lawsuit would be “inevitable”? I attend every single AICPA Town Hall and hadn’t heard anyone suggest this. And what a sad thing to suggest it would be a “great opportunity” for a law firm — to specialize in making money off those desperate to finally receive what they and their accountants had already worked so hard to obtain.

As usual, I decided to quell those fears until the next AICPA Town Hall, and I’m so glad I did, as Lisa Simpson made ERC the first topic in her Technical Update. She explained the recent IRS news release that likely triggered the unfounded rumblings I was hearing, as well as referenced a new Journal of Accountancy article that delved deeper.

My takeaway was that: while 10-20% of claims are clearly fraudulent, and the IRS is in the process of denying them; and another 60-70% show an unacceptable level of risk and will be examined carefully — there are also between 10% and 20% of the claims show a low risk. The IRS “will begin judiciously processing” more of these claims, and, according to the release, expects some of these payments to be made later this summer.

To me, that’s all good news. It means they’re working through the piles and expediting the ones that have straightforward claims where the businesses played by the rules, processing the oldest ones first. The rest will be examined more critically, or in the case of blatant fraud, flat-out denied.

The one disappointing piece of information is that no claims submitted during the moratorium will be processed at this time. But at least we know the backlog is being cleared to make way for them. Since the moratorium was put in place, the IRS has received over 17,000 claims per week.

I’ve let my clients know that they shouldn’t budget for these dollars for at least another year, but that there’s no reason to presume they won’t eventually receive the claims that are due to them.

And yet again I learned that if something sounds sensational and suspicious… it might not be grounded in evidence and analysis. Rely only on your trusted advisors for the education and resources that will help you guide your small business clients. (And then provide links to those resources to the sensationalists who spread misinformation.)

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. Ths allows me to continue to provide free accounting resources to small businesses who do not have the funds available to hire a CPA.

Education, IRS, Software, Tips

How To Add Health Insurance To S-Corp 2%+ Owner W-2 In Gusto

December 28, 2022 Nancy McClelland Leave a comment

As anyone who’s worked with me — clients, team members, colleagues, vendors — knows, I adore Gusto Payroll. They truly changed my life for the better (not to mention the lives of thousands of small business owners) when they decided to create a tech-forward payroll company that seamlessly syncs with QuickBooks Online.

(Note: our affiliate link will earn you a $100 gift card after you run your first payroll — or up to $500 if you are an accountant or bookkeeper who signs up your own clients. We may earn a commission as well — win-win! For our own clients, we offer a 15% discount in lieu of referral fees.)

I have explained the importance in prior blog posts of making sure that S-Corp medical premiums are properly tracked and reported in QuickBooks and on the W-2 forms for shareholder-employees. The IRS has driven this point home repeatedly, and even has a page devoted to som e issues that arise specific to owners of 2% or more of an S-Corp who perform services for the company.

With so many of our own clients using Gusto, I wanted to share how to properly report S-Corp medical insurance premiums, and decided to make the information available to the public as well.

Much of the following information was collected from the Gusto Help section — which is freely available to the public — but as their dynamic support site changes structure and organization frequently, it seemed like collecting the various instructions into one area would be helpful.

Setting up benefits for S-Corp 2% shareholder-employees

For S-Corps, the IRS requires that health insurance premiums paid by the company to employees with a 2% or greater ownership be reported as wages (not pre-tax benefits), and included on their W-2s in Box 1, but not Boxes 3 or 5.

(This means that the total will be taxable for income taxes but not payroll taxes, and once the self-employed health insurance deduction is taken on the personal return, the wages and deduction net to zero — so in effect the corporation will have taken the deduction for the health insurance. More in this blog post and from the IRS here.)

Note: If your company’s benefits are provided through Gusto, they will manage this reporting for S-Corp owners automatically, as long as they are marked as a 2% shareholder in Gusto (under “Employment Details” in the shareholder-employee’s info in the “People” section).

However, if you offer benefits outside of Gusto (and use Gusto for payroll), then follow these steps to set up benefits for 2% shareholder employees:

Sign in to your Gusto admin account.
Go to the People section and select Team members.
Click on the employee’s name.
Under Employment Details, make sure the employee is designated as a 2% Shareholder.
Under Benefits, click Add Benefit.
Next to Select a Benefit, select “Create New Benefit” from the drop down menu.
Enter a Benefit Name.
Next to Benefit Type, select Medical, Dental, or Vision.
You will have the option to enter a Company Contribution Per Pay Period or Employee Deduction Per Pay Period. (For S-Corp shareholder-employees, this will usually be a company contribution, but check how your plan is set up.)
Company contributions: Taxable at the employee level only, for both federal and state income tax.
Employee deductions: Fully taxable as wages at both the employee and employer level.
Click Save.

As long as the entity is set up in Gusto as an S-Corp and the shareholder-employees that own 2% or more of the company are marked as such under Employee Details, the health insurance premium benefit should be added to Box 1, but not Boxes 3 or 5. You should review your draft W-2 at or shortly after year-end to make sure it is accurate, and contact Gusto immediately if there are issues so they can correct them before the final W-2 is issued and filed with the IRS and SSA.

FAQs about 2% shareholders:

Q: Which benefits must be taxed as wages for 2%+ shareholders?

A: Medical, Dental, Vision, HSAs, and more must be taxed as wages. Refer to Publication 15-B to view all a full list of benefits that are treated as wages.

Q: What if a 2%+ shareholder status changes part way through the year?

A: Change the 2%+ shareholder status in the employee’s account. Employees who are 2%+ shareholders at any point during the year must be taxed as such for the entire year.

Q: What happens if you need to update an employee’s 2%+ shareholder status mid-or-end year, and they have already received pre-tax benefit deductions this calendar year?

A: If your company withheld health insurance premiums rather than having them processed as 2%+ shareholder — contact Gusto Support, as their team will need to assist within adjusting the benefits, since there are tax implications.

Cooperatives, COVID-19 Financial Relief, Education, IRS, Tips

NSAC Offers Employee Retention Credit (ERC) Webinar Aug 23

August 15, 2022 Nancy McClelland Leave a comment

Employee Retention Credits (ERC) (nsacoop.org)

My colleagues at the National Society of Accountants for Cooperatives are offering a 75-minute webinar on Tuesday, August 23 to discuss the requirements and pitfalls in claiming Employee Retention Credits (ERC). The cost is free to members and $56 to non-members.

The ERC has been in the news quite a bit lately due to aggressive tactics by non-CPA firms claiming to be able to apply for these credits on behalf of business owners. (We’ll have an upcoming blog covering that topic.) However, the rules regarding whether or not a business qualifies are complex, and best performed by a knowledgeable professional.

During this webinar, the panelists will provide an overview of the Employee Retention Credit (ERC) and how to qualify for ERC including:

• Partial and full shutdowns as they apply to the ERC
• What constitutes “gross receipts”
• Safe Harbors
• Rules for Large Employers
• Unsettled matters and how the IRS is examining ERC claims

Participants are encouraged to submit questions in advance at info@nsacoop.org and during the session.

If you are an accountant or bookkeeper calculating these credits for your clients, or a business owner considering a DIY approach, please make sure you are thorough about obtaining education and resources before submitting anything to the IRS. You can expect their enforcement division to ramp up audits in the next few years.

Employee Retention Credits (ERC) (nsacoop.org)

COVID-19 Financial Relief, Education, IRS, Tips

IRS Finally Issues Guidance On Employee Retention Credit (ERC)

August 12, 2021 Nancy McClelland Leave a comment

It finally happened… the IRS released long-awaited guidance on the Employee Retention Credit (ERC):
• August 4 – Notice 2021-49 and accompanying IR-2021-165
• August 10 – Rev. Proc. 2021-33

Some major questions were answered:
• Whether wages of more than 50% shareholders and their spouses are considered qualified wages for the purpose of the credit.
(Mostly “no”, unless you’re an orphan with no living siblings or kids. Much frustration abounds — more on this later.)
• Whether cash tips are included in qualified wages.
(Yes. Good news!)
• Whether full-time employees or full-time equivalent employees should be used to calculate the number of employees to determine whether a business is a small or large eligible employer.
(Head-count, not FTEs. Good news again!)
• Timing of the wage deduction disallowance.
(Must be on 2020 tax return, so amend if already filed.)
• Does gross receipts for ERC include PPP, SVOG, RRF?
(Mostly “no”, as long as you treat them consistently. More good news!)

They also released rules on changes made to the ERC by the American Rescue Plan Act (ARPA) regarding:
• Recovery Start-up Business
• Severely Financially Distressed Employer

There were other significant updates to the ERC as well, including clarifications as to:
• If an employer may claim both the ERC and the Internal Revenue Code Section 45B “Tip Tax Credit” that applies to food and beverage workers.
(YES! You can double-dip. Truly shocking, and good news.)
• Instructions on amending filed income tax returns returns after receiving the ERC.

Thankfully, the AICPA shared numerous resources on these in this week’s Town Hall — I strongly recommend viewing the AICPA TV session called “Employee Retention Credit: Your Questions Answered”. In this video, Kristin Esposito and April Walker review the IRS notice and explain guidance on the common questions listed above.

Additionally, AICPA released two Tax Adviser Articles:
• Guidance on claiming ERC
• New safe harbor for ERC gross receipts calculation

They are also putting together a panel of practitioners for a September Town Hall, to discuss how each is dealing with client returns based on this new guidance.

In addition to all the AICPA goodies, our go-to legal resource, Alan Gassman and Brandon Ketron recorded a “PPP and ERC Update” video on August 7th that explores (and vents) Notice 2021-49 (it was recorded prior to Rev. Proc 2021-33, so there’s no reference to the fact that PPP, SVOG, and RRF receipts are not included in gross income for ERC qualification purposes).

Which is a good segue to circle back to the frustration derived from the IRS’s “letter of the law” guidance. The basic idea is that if owners have any living relatives (regardless of association with the business), their wages do not qualify for ERC — but those of an orphan with no siblings or offspring would. Unsurprisingly, this didn’t go over well in the accounting and legal communities:

NCCPAP blasts IRS guidance on Employee Retention Credit | Accounting Today

Newly Issued Employee Retention Credit Guidance Punishes Owner Employees If They Have Living Family Members | Forbes

Practitioners call for fixes to the Employee Retention Credit | Accounting Today

IRS Issues Additional Guidance for Claiming the Employee Retention Tax Credit | Gould & Ratner LLP – JDSupra

I suspect the IRS is attempting to force Congress’s hand by taking the sloppily-written legislation at face value and therefore releasing a ridiculous literal interpretation they know could not have been intended. But without sufficient administrative authority to read their own preferences into it, the IRS has now put Congress in a position to have to release new legislation to explicitly spell out their original intent. Will this happen anytime soon? Do we hold off on filing client 941-X returns in the meantime? Or is Congress too busy to right this wrong?

We’ll be mulling these questions over in the next few weeks, with the intention of making a game-time call with enough time to get our September 15th extended business tax returns filed.

COVID-19 Financial Relief, Education, IRS, Site News, Tips

Client Options for Claiming The Employee Retention Credit (ERC)

June 19, 2021 Nancy McClelland Leave a comment

Note to readers: the issue outlined below only applies to 50%-or-greater shareholders — which means the business is a corporation — and their spouses who work at the company. It does not apply to sole proprietors or partners — those two groups do not get paid via payroll and therefore are not eligible. Shareholders who own less than 50% are eligible if the business meets the other requirements to claim the credit.

If you are a 50%-or-greater shareholder and your company qualifies for the Employee Retention Credit for either 2020 or 2021, please read on.

I truly cannot believe that it’s June 2021 and I’m writing a blog post to help people choose the least-worst 2020 Employee Retention Credit interpretation — because even though the pandemic is starting to show in our rearview mirrors, we are still living in a universe totally devoid of IRS guidance on the topic of ERC shareholder eligibility. Accountants jokingly refer to this mystery as the Tax Advisers’ “Area 51” on #TaxTwitter.

What am I talking about? And why am I so annoyed? Let me set the scene:

1) Many small business owners are eligible retroactively for the 2020 Employee Retention Credit (ERC), and the IRS decided that the corresponding reduction in wages for that credit needs to be on the 2020 tax return.

2) However, the company’s Paycheck Protection Program (PPP) Forgiveness application needs to be prepared before calculating the amount of the ERC, in order to maximize the amount of financial relief the client receives between the two programs. Therefore, at our firm, these returns are all on extension while we run these calculations.

3) Now that the first round of PPP loans are nearing the end of the payment deferment period — and to be fair, we’re also only a few months away from the tax return extension deadline — we would like to finalize those calculations and returns. (Reminder: there is no “deadline” for applying for PPP Forgiveness — per the SBA, “borrowers can apply for forgiveness any time up to the maturity date of the loan. If borrowers do not apply for forgiveness within 10 months after the last day of the covered period, then PPP loan payments are no longer deferred, and borrowers will begin making loan payments to their PPP lender.”)

4) The catch is — that the IRS has still not released guidance on whether or not 50%+ owners of a corporation are eligible for the credit (or their spouses who work for the business). Accountants are split down the middle on what the existing legislation, which is extremely unclear, tells us on the topic. As such, we either need to take a position or continue to wait for IRS guidance.

What’s that? You’re saying the IRS has still not issued essential guidance on a credit that was created in the first month of the pandemic? Yes. Yes, I am.

Recently, both the AICPA and Tony Nitti, two of my most trusted sources, have weighed in on this with a big “why is the IRS dragging their heels on this” reaction. Nitti went as far as to say, “Are wages paid to greater than 50% owners eligible for the credit? If I had a nickel for every time someone emailed me this question, I could afford to stop shamelessly and relentlessly shilling this newsletter. It is absolutely amazing that a full year after the ERC was created, we still don’t have a definitive answer.”

Okay, enough backstory. As a small business owner, what are your options? I call them Choice 1 (yes) and Choice 2 (no) for short:

#1 Calculate ERC as if owners are eligible and file 2020 income tax returns accordingly. This would result in a higher tax for clients (because more wages are disallowed as deductions). Submit PPP Forgiveness applications, but hold off on submitting ERC claims (941-Xs) until guidance is released. If guidance indicates that owners are eligible, file the ERC claims accordingly. If guidance says owners are not eligible, then amend the income tax returns and file the ERC claims accordingly.

This approach may make the most sense when there are two 50%-owners on payroll, and not many other other staff — as the increased credit would be worth the wait, compared to the total credit without owners.

#2 Calculate ERC as if owners are not eligible and file 2020 income tax returns accordingly. This would result in a lower tax for clients (because fewer wages are disallowed as deductions). Submit PPP Forgiveness applications, and submit ERC claims (941-Xs) — rather than holding off on these as in the above option. If guidance is eventually released that indicates owners are not eligible, then no action is needed. If guidance indicates that owners are eligible, then decide whether it is worth amending the income tax returns and ERC claims to get the additional funds.

This approach may make the most sense with only one 50%+ owner and many employees, as the cost to amend all returns and claims will probably not be worth the additional credit.

The goal with both approaches is to get PPP Forgiveness applications and tax returns filed as soon as possible, with the best balance between wage deductions and potential wage credits.

While I was tempted to pick one of these two approaches and inform all clients of our choice, I decided — especially with advice from an AICPA Town Hall — that this is a decision that each client needs to make for themselves. We’re happy to explain the potential costs and benefits of each approach and make a personal recommendation for each client’s individual situation, but the decision should be theirs. We recommend other CPA firms take a similar approach.

COVID-19 Financial Relief, Education, IRS, Tips

2020 Employee Retention Credit FAQ

June 18, 2021 Nancy McClelland Leave a comment

I recently received a few questions based on earlier blog posts, discussions with colleagues, and Slack conversations, and thought it might be helpful to readers to share them all here.

Q: I attended the Compass seminar you recommended and it was super-helpful. I noticed that she didn’t have anything on row 30 of her 941-X, but on the other example we discussed, there were Line 30 entries on her 941-X that was generated by Gusto. Should I have something on line 30?

A: The Compass seminar presenter made a couple mistakes and they issued corrected pdfs afterwards – if you took the course, make sure you have the file called “Corrected_Forms_941-X_for_Case_Study.pdf” to refer to as you are preparing amended 941s to claim the Employee Retention Credit.

The first correction was that column 4 on the 941-X should be negative (even though that math makes no sense on the face of the form).

The other correction was that Lines 30 and 31 are blank in their original examples and should have totals on them. In the seminar, they had entered amounts on the Worksheet 1, Step 3, Line 3a (and 3b if there was health insurance), but then I think they just forgot to also enter them on the face of the form. (In the Worksheet it says these numbers come from Form 941, Lines 21 & 22 – and those correspond to Form 941-X, Lines 30 & 31.)

We built our own Excel version of Worksheet 1 to make all these calculations easier — not hard to do: just copy the last page of the IRS Form 941 instructions, paste into Excel, and set it up to do the simple math. We also made the following notes in Step 3:
a) For Step 3a, “This data will come from the ERC spreadsheet Total Wages row 20 (make sure to add Q1 + Q2 when preparing Q2). Enter on 941-X line 30.”
b) For Step 3b, “This data will come from the ERC spreadsheet Total Benefits row 21 (make sure to add Q1 + Q2 when preparing Q2). Enter on 941-X line 31.”.
c) For Step 3d, “Enter on 941-X line 27 *make sure amount in column 4 is a negative.”
d) For Step 3h, “Enter on 941-X line 18 *make sure amount in column 4 is a negative.”
e) For Step 3i, “Enter on 941-X line 26 *make sure amount in column 4 is a negative.”

Q: Let’s say your PPP2 window is March 1 through August — it sounds like you’re not required to use wages from March 1-31 for your PPP2 forgiveness? You can take all of 1Q 2021 towards ERC and then use wages from April 1 and beyond for PPP2 forgiveness?

A: Yes, exactly – what we are doing in our firm is this: we calculate the minimum amount of wages + health insurance that are needed for PPP – and we use SUTA and retirement first, so that we use as few actual wage + health insurance dollars as possible (because ERC doesn’t use SUTA & retirement). That gives us a “target” that we use in our ERC calculations.

Then we assign wages + health insurance for the PPP period to each employee so as to maximize what’s left over for ERC. The difference has been really amazing, and worth the extra work.

So rather than picking wages to use for ERC based on which quarter they’re in to make it easier for filing, we’re picking them based on what maximizes the amount for ERC.

But the point is — that you can do it however you want, which was the second-to-last big piece of guidance I needed to make this system work to my clients’ advantage the most. (The other piece, whether 50%+ shareholder-EEs count for ERC, is something we’re still waiting on the IRS for. No one can believe they haven’t shared this yet.)

Follow-up question: Where did we land if we have to use every employee for the same duration for PPP forgiveness? So let’s say in the 24-week window you only need 13 weeks to get to forgiveness if you’re including everyone. Instead, could you use 3 employees for 24 weeks and then 2 employees for just 8 weeks (as an example off the top of my head). Or do you have to use all 5 employees for 13 weeks, or whatever it takes? Because in option 2, you’d have 3 extra weeks for the lower paid employees to use for ERC. If that makes sense what I’m asking.

A: There’s no requirement for PPP on a per-employee basis – it’s just a total dollar amount. Amazingly flexible. This analysis is accurate.

Q: The Compass presenter mentioned something about the more than 50% shareholder and whether those wages count. I’ve got two clients who have employee shareholders, and I hadn’t really considered this yet. Do I count their wages?

A: We don’t know! We’re helping clients decide what to do on a case-by-case basis, using this approach (I wrote this up for RRF but it’s still valid for anyone who’s left):
Restaurant Revitalization Fund: Client Options for Tax & ERC Filings | The Dancing Accountant

Follow-up question: Regarding the Shareholder wages— Let me see if I understand it. I have a C-corp where one employee was the founder and basically has 90% of the stock. Is it a question as to whether he counts? And his wife works there as well. So it sounds like either way I cannot include her? Another employee has 10% of the stock. So he counts for sure, right?

A: The 10% employee counts for sure, and we don’t know about the 90% C-corp owner or the spouse that works there, which is why I’m making my clients choose Option 1 or 2 in the blog post I referenced. By coincidence, they reiterated in today’s AICPA Town Hall that we still don’t freaking know the answer here.

Q: What date do I date the JE for “ERC Receivable”? Is it the last date of the quarter for that 941X? (Rather than the date I send the amendment.)

A: Yes, because the IRS decided to be massive jerks and require this to be subtracted from deductible wages in the year of the payroll, rather than the year of the amendment, even for cash-basis tax filers.

Personal rant: after the past two tax seasons, have to admit that I hate Chuck Rettig with a passion.

Q: So if I do form 941Xs, do I need to also send 7200s? Or is that an either/or situation? We definitely want refunds (not just applying refund towards future payments.)

A: No, the Form 7200 is only for advance payments — you would file it to get an advance payment of the refund before the end of the quarter in which you qualify. Once the quarter ends, you claim the credit on the Form 941, and reconcile the amount you’ve already applied to receive in advance. By all accounts I’ve heard, it’s not worth the trouble.

Q: Finally–if I do the 941x’s myself, then do I need to notify that particular payroll company what I’ve done?

A: Not according to Gusto, because it only affects the cash paid, not the liabilities or reported amounts. It’s treated as an overpayment that will be refunded, so it doesn’t change things on their end — but I’m not sure about other payroll companies.

COVID-19 Financial Relief, Education, Tips

Covid-19 Sick & Family Leave Credits For Employers Extended Through 9/30/21 & Expanded

March 22, 2021 Nancy McClelland Leave a comment

The American Rescue Plan Act (ARPA), just recently signed into law, offers many generous tweaks to federal programs for employers trying to take care of their staff, and for former employees. There are six in particular every employer should research on their own behalf and for the benefit of workers:

Paid Sick & Family Leave
COBRA Subsidies
Dependent Care FSAs
Employee Retention Credit
Short-Time Compensation
Unemployment Insurance

The Department of Labor will be issuing regulations or other guidance regarding these changes to the FFCRA.

Ellen M. Bronchetti & Syed H. Mannan of McDermott Will & Emery have done an excellent job summarizing these updates in this article. I’m including their sections on Paid Sick & Family Leave as well as COBRA Subsidies almost in their entirety — as no amount of summarizing seems to do them justice. I’ve included additional information on the COBRA Subsidies from L. Renee Lieux of McNees Wallace & Nurick.

Homework: Fox Rothschild has a nice Guide For Employers to the American Rescue Plan Act — it’s a good place to start digging into all the provisions.

Paid Sick & Family Leave

Under the previously passed Families First Coronavirus Response Act (FFCRA), companies with fewer than 500 employees were required to provide paid leave to employees who were unable to come to work for a number of Covid-19 related reasons. FFCRA provided employers a refundable tax credit, which would offset for employers the costs of providing the paid leaves.

The requirement to provide paid leave expired for employers with fewer than 500 employees at the end of last year. But employers can still voluntarily choose to provide FFCRA paid sick or paid family leave to employees and receive refundable tax credits for costs related to providing the leave through March 31, 2021.

This is a great value for staff and to employers, and helps keep customers and the community safer as well.

With the passage of the American Rescue Plan Act of 2021, employers should note the following additions and changes:

Refundable Tax Credits Available through September 30, 2021: Employers who choose to voluntarily provide FFCRA paid sick or paid family leave may now receive refundable tax credits through September 30, 2021.

Additional Covered Reasons for Providing Paid Sick Leave:
Previously under the FFCRA, qualifying reasons for providing paid sick time were limited to if the employee is unable to work (or telework) because (s)he:
(1) is subject to a federal, state or local quarantine or isolation related to Covid-19;
(2) has been advised by a healthcare provider to self-quarantine;
(3) is experiencing Covid-19 symptoms and seeking a diagnosis;
(4) is caring for an individual who is subject to quarantine or is self-quarantining;
(5) is caring for a child whose school or place of care is closed (or child care provider is unavailable) because of Covid-19; or,
(6) is experiencing any other substantially similar condition specified by the US Secretary of Health and Human Services.

ARPA expands on the list and now allows employers to provide leave to employees for three additional reasons:
(1) obtaining a Covid-19 immunization;
(2) recovering from an injury, disability, illness or condition related to the immunization; or,
(3) seeking or awaiting the result of a Covid-19 test or diagnosis when the employee has either been exposed to Covid-19 or the employer has requested the test or diagnosis.

Additional Covered Reasons for Providing Paid Family Leave: The scope of reasons for providing emergency family leave is now expanded. Originally, tax credits were available to employers for providing paid family leave only if the employee was unable to work (or telework) to care for a child whose school or place of care was closed or unavailable because of the public health emergency. Now, employers can claim tax credits for providing family leave which arises from any of the six qualifying reasons provided for in the FFCRA and the additional three reasons added under ARPA (noted above).

Duration of Paid Sick and Family Leave for Receiving Tax Credits: ARPA allows employers to receive the tax credit for providing up to 10 days of paid sick leave beginning on April 1, 2021, even if the employer previously took a tax credit for providing paid sick leave to an employee for a covered reason before April 1, 2021. In addition, employers can receive a tax credit for providing up to 12 weeks of paid family leave. In other words, the clock sort of “re-sets” on sick and family leave.

Amount of Tax Credits Available for Paid Sick Leave: Employers providing voluntary paid sick leave receive a tax credit, up to a cap of $511 a day, at the employee’s regular rate of pay if the employee is on leave because of coronavirus quarantine, self-quarantine or has symptoms. ARPA now includes the additional covered reasons (discussed above) for receiving tax credits at the employee’s regular rate of pay. For any other paid sick leave reason, the amount of tax credit available to an employer is calculated at two-thirds the employee’s regular rate of pay and capped at $200 a day.

Amount of Tax Credits Available for Paid Family Leave: Employers providing paid family leave receive a tax credit, up to a cap of $200 a day, at two-thirds the employee’s regular rate of pay for leave which is due to any of the covered reasons for providing paid family leave. ARPA also removes the two-week waiting period (during which the leave was unpaid) for taking paid emergency family leave. The Act also increases the cap on the aggregate paid leave from $10,000 to $12,000, meaning employers can now take an additional $2,000 in tax credits per employee for providing qualifying leave.

Addition of Non-Discrimination Rules: Employers who are voluntarily providing leave and receiving tax credits must also follow the new non-discrimination rule. The anti-discrimination rule makes the tax credit available only to those employers who provide leave to all employees without discriminating against certain categories of workers. Specifically, the tax credit is not available to those employers who discriminate (1) in favor of highly compensated employees, (2) full-time employees or (3) on the basis of the employment tenure of the employee.

Cobra Subsidies

Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage allows employees to continue to remain covered under their employer’s health insurance for up to 18 months after coverage is lost because of a reduction in work hours or the employee’s involuntary termination of employment.

Prior to ARPA, workers and dependents assumed full responsibility for payment of premiums. ARPA now provides up to six months of 100% subsidized COBRA coverage to those who are eligible for COBRA because of an involuntary termination from employment or a reduction in work hours. The premium subsidy will last from April 1, 2021, through September 30, 2021, and sponsors of group health plans will be subject to new notice requirements. Employers will receive reimbursements for the subsidy through a payroll tax credit.

Employers must provide three notices to eligible former employees notifying them of the premium subsidy, the extended opportunity to elect coverage, and when the premium subsidy will be terminated.

In addition, employers may, at their option, allow former employees who are currently electing COBRA to elect coverage under a different plan offered by the employer as long as (i) the premium for the new coverage does not exceed the premium for the current coverage, (ii) the new coverage is not an excepted benefit, a QSEHRA, or a FSA, and (iii) the employee did not voluntarily terminate employment.

Cooperatives, COVID-19 Financial Relief, Education, IRS, Tips

Changes to Paycheck Protection Program (PPP) Starting Feb 24

February 23, 2021 Nancy McClelland Leave a comment

A slide from this morning’s CPA Loan Portal-AICPA update.

Big changes yet again in the world of the Paycheck Protection Program (PPP), where it sometimes seems the only constant is change.

The White House released a Fact Sheet early yesterday indicating immediate changes to the program intended to shift focus to small businesses with few or no employees, and increase program access to those who may otherwise have been shut out.

The five main changes, as summarized in the CPA Loan Portal-AICPA slide above (from this morning’s webinar), are in two different areas — “Focusing On Small Businesses” and “Increasing Program Access”, and are as follows:

Starting Wednesday, a temporary pause in applications for 20+ employee businesses.
New eligibility calculation rules for Schedule C self-employed (see below).
Borrowers with non-fraud convictions will no longer be prevented from applying.
Student loan delinquency will no longer prevent borrowers from applying.
Clarify that ITIN applications for non-citizens will be accepted.

The biggest take-away for our client base is #2 above — this particular section of the White House statement:

Help sole proprietors, independent contractors, and self-employed individuals receive more financial support.
These types of businesses, which include home repair contractors, beauticians, and small independent retailers, make up a significant majority of all businesses. Of these businesses, those without employees are 70 percent owned by women and people of color. Yet many are structurally excluded from the PPP or were approved for as little as $1 because of how PPP loans are calculated. To address this problem, the Biden-Harris administration will revise the loan calculation formula for these applicants so that it offers more relief, and establish a $1 billion set aside for businesses in this category without employees located in low- and moderate-income (LMI) areas.

The SBA followed up with their own release shortly afterwards, stating, “The 14-day exclusivity period will start on Wednesday, February 24, 2021 at 9 am, while the other four changes will be implemented by the first week of March. The SBA is working on the program changes and will communicate details throughout this week.”

Therefore, self-employed taxpayers should wait until the new rules are released next week to apply for PPP funds.

What does this mean for applicants and their advisors?

PPP loans are based on wages to employees, which are subject to “payroll tax” (or “Social Security & Medicare taxes”). Whereas for certain types of one-person companies that don’t have payroll, the amount is calculated based on the net profit from IRS 1040 Schedule C — the amount on which “self-employment tax” is paid (also known as “Social Security & Medicare taxes”).

As CNBC reports, because of this method of defining “payroll” for the self-employed, some applicants saw very low loan amounts in previous rounds of the program, because they make very little in profit.

To “fix” the issue, the SBA is revising the formula to match what it uses for farmers. This basically means that they will calculate loan amounts from gross income instead of net profit.

This means that millions of small business owners who posted a loss in 2019 or 2020 will still be able to apply for PPP funds, based on their revenues before deductions are taken.

This sounds wonderful — and to some extent is — but it’s inherently unfair to partnership owners, who also have their PPP loans based on self-employment income. It’s also unfair to the millions of Schedule C filers who already applied for both rounds of the PPP without the benefit of this changed rule.

In a Forbes article from yesterday afternoon, Brian Thompson pointed out, “even more important is the question of whether this formula will be retroactive for those sole proprietors who have already applied. We don’t know yet whether these businesses will be allowed to gross up based on the new formula.”

As for small business advisors, it puts us back in a sprint again, during an already-grueling tax season. This morning, we developed our plan internally for next steps, which is to identify:

1) Clients who file Schedule C;
2) Who have not filed for PPP;
3) Because they have a loss or very low income on Line 31 of their 2019 Schedule C.

Then we’ll reach out to each one of them to explain that they may in fact be eligible for PPP after all, and to offer to prepare their application through our CPA Loan Portal, as we’ve been doing since early January for all our clients who qualify.

Although I am extremely grateful for this opportunity for small business owners, the inequity of the situation is extremely upsetting; we will see if additional changes are made that allow partnerships and prior applicants to use the same rules. But even if those concessions are made, there is an inherent issue with using gross revenues rather than net — which is that other types of single-member companies (S-corps, C-corps, Non-profits and Co-operatives) did not have the same option, and I know quite a few that suffered from lack of PPP funding as a result; even harder-hit were newer companies that did not show a 25% decrease from 2019 to 2020. (It’s hard not to go up from zero.)

I could go on, but I won’t, because it’s tax season and I have to take care of client deliverables in the midst of it all. Who knew that client financial relief would be such a moving target?

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.

COVID-19 Financial Relief, Education, IRS, QuickBooks Software, Tips

FREE Bookkeeping Buds Webinar Recording – Troubleshooting The New ERC Rules

January 4, 2021 Nancy McClelland Leave a comment

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.

For a wonderful in-depth explanation of the Employee Retention Tax Credit, please see Tony Nitti’s two-part Forbes article:
– Breaking Down Changes To The Employee Retention Tax Credit In The New Covid Relief Bill, Part 1
– Breaking Down The Changes To The Employee Retention Credit In The New COVID Relief Bill, Part 2
– Part 2 also links to an earlier article of his that goes thorough the details of calculating the ERC according to the 2020 rules.

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:

Client PPP-EIDL-ERC template Download

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.

COVID-19 Financial Relief, Education, IRS, Software, Tips

How To Look Up The Employee Retention Tax Credit (ERC) In Gusto Payroll

December 29, 2020 Nancy McClelland 4 Comments

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!

Accounting Services for Small Businesses