Top 5 Questions Your Clients Will Ask About the ERC
Thought Leadership by KBKG
Many clients may inquire about the employee retention tax credit this season. Naturally, you want to prepare accurate returns while strategically reducing tax liabilities and avoiding audits. The Internal Revenue Service issued a severe warning in March of 2023 about improperly claiming the credit. Scam artists are mercilessly pursuing ineligible businesses and urging them to file claims. This guide briefly details what your clients may ask about the ERTC tax credit.
Table of Contents:
What Are Qualified Wages for the ERC?
The Employee Retention Credit was part of the original Coronavirus Aid, Relief, and Economic Security Act of 2020. It was extended several times by additional laws passed in 2020 and 2021. The IRS offers a helpful comparison chart showing how the credit works for each year:
- Credits under the CARES Act cover March 13 to December 31, 2020.
- ERC claims under the Relief Act of 2021 cover January 1 through June 30, 2021.
- The American Rescue Plan and the Infrastructure Investment and Jobs Acts extended the 2021 eligibility period cutoff date to September 30.
- The IIJA extends the credit to “recovery startup businesses” that paid wages between October 1 and December 31, 2021.
Employers meeting these guidelines can claim this credit for wages paid during those years. Qualified wages generally speaking are those wages reported on the W2. Eligible employers with less than an average of 100 full-time employees in 2019 may take the credit for all employees paid wages in 2020. However, the IRS clarifies that “wages reported as payroll costs for PPP loan forgiveness or certain other tax credits can’t be claimed for the ERC in any tax period.”
Do tips qualify for the employee retention credit? According to IRS Notice 2021-49, you can include tips — provided they meet the other qualified wage criteria.
How Does the IRS Determine Eligible Employers?
Employers may take the ERC if they meet specific guidelines. The IRS states that they must meet one of three distinct criteria:
- Sustained a “full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority”
- Impacted by “a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021”
- Qualified in the third or fourth quarters of 2021 as a “recovery startup business.”
Ineligible businesses that take ERC (or ERTC) tax credit may face significant consequences.
How Do You Calculate Qualified Wages for the Employee Retention Credit?
You can easily calculate the ERC yourself. The IRS permits up to 50% of the qualified wages of an eligible employee during the calendar year. The maximum credit is $5,000 per employee, based on an upper limit of $10,000.
You’ll use a different formula to calculate qualified wages for the Employee Retention Credit 2021. It’s 70% of qualified wages and certain healthcare benefit costs that you paid to an eligible employee, up to $10,000. Employers earning this credit may take $7,000 quarterly per employee. Alternatively, they can take $28,000 per employee for 2021.
Do Family Members Qualify for Employee Retention Credit?
Family members of majority owners (someone who owns more than 50% of the voting shares of partnership interest) do not qualify for the ERC. Exempt employees include children, siblings, step-siblings, parents, grandparents, step-parents, aunts, uncles, nieces, nephews, and most in-laws. Employees are also exempt if they live in the taxpayer’s household.
Do S-Corp Owners Qualify?
S-corp owners may ask, “Do I qualify for the employee retention credit?” Unfortunately, wages paid to S-corp majority owners do not qualify. The IRS defines a majority owner as someone who owns over 50% of a corporation’s value.
Do S-Corp Shareholder Wages Qualify for ERC?
An S corporation cannot claim wages it paid to employees who are also majority owners. These include shareholders who own more than 50% of a corporation.
Where Can You Get Trusted ERC and Tax Information?
Certified public accountants turn to KBKG for critical information on ERC (or ERTC) and other complex tax issues. Need assistance? Request a proposal or call (877) 525-4462.
KBKG is providing the following services to assist with ERC:
- Determine if the employer qualifies, and if so, for which quarters,
- Determine which employee wages qualify
- Calculate credits, including analysis of PPP interplay, and
- Reconcile actual credits with advance credits requested
- Prepare reconciled data for Form 941-X
- Prepare documentation supporting a business’ qualifications