Employee Retention Tax Credits
Fueling a Post-Pandemic Economic Recovery
by David Albin, wealth advisor, Wealth Building Now
(Editor’s Note: To best serve business owners, and high and ultra-high net-worth families, David Albin applies holistic financial analysis and brings an expert specialist team. Using proven methods, clients can gain tax advantages, income and asset growth, wealth preservation, business resilience, and greater family harmony. He can be contacted at david@wealthbuildingnow.com and (855) 451-0500. To learn more about his services, please visit www.wealthbuildingnow.com.)
Employee Retention Tax Credits (ERTC), which are intended to help accelerate recovery and growth of companies that surmounted the pandemic challenges of the past 18 months, are now available to qualifying businesses. Because the credits can amount to many thousands of dollars per qualifying employee, all companies should investigate how they may qualify for and receive ERTC.
Congress enacted ERTC as an economic stimulus to help employers continue operations and thrive and to keep providing employment. At first glance, qualifying for ERTC appears deceptively simple. The most publicized rules say that companies that either had sizeable drops in gross receipts on a quarterly basis from 2019 to 2020 or 2019 to 2021, or that was forced to operate under government ordered shutdowns and restrictions could be eligible.
The IRS website headlines qualifying in a very simple way, saying revenue drops from 2019 to 2020 of over 50% for any quarter qualify for up to a $5,000 per employee credit. They go on to say decreases over 20% from 2019 to 2021 on a quarterly basis can qualify companies for up to $7,000 ERTC per employee per quarter. That means that for the entire year of 2021, the credits could reach as much as $28,000 per employee. Interestingly enough, qualifying for a single quarter in 2021 automatically creates credits for three quarters. Companies that do not qualify on the reduced-gross-receipts test may qualify in other ways. Provisions that qualify companies that were subject to government-ordered shutdowns and restrictions may mean smaller revenue drops may still qualify in those cases.
So far, so good, but the devil is in the details. For one thing, the maximum credit per employee is a function of salary levels. Additionally, there are many classifications of employee compensation, and not all of them qualify for inclusion in the basis for ERTC. This presents some tricky challenges. Most companies will need outside support from their accounting firms or from other tax planning specialists, working with carefully defined information from their accounting and payroll suppliers, to get the calculations, credit applications, and generation of the supporting work papers right.
There are many categories of employee compensation, and not all of them can legitimately be a part of the basis for determining ERTC. There are pages and pages of IRS instructions about what compensation qualifies for ERTC and properly categorizing and tracking those paycheck payments that should be part of ERTC. This is such a complex area that the IRS has obtained a seven-year audit window to review ERTC filings.
You will be well served by insisting on a CPA-tested ERTC model to perform these complex calculations and to provide IRS-audit-ready documents. Further marks of a good supplier of ERTC calculations and applications will be one that has a sharp intake process, a way to gain a very early estimate of what the credits may total, and a streamlined method to pour in information from payroll systems. The payroll data must be categorized and sifted to drive the required calculations. Amounts from each paycheck have to be trackable in the totals presented to claim the credits. Please be sure to retain the complete set of audit-compliant work papers for seven years.
It is also desirable to select a tax-planning specialist firm that can turn your raw data into ERTC application-ready documents in the shortest time, so that you have the opportunity to use credits to offset some of your upcoming quarterly estimated payments. For those employers who may not have claimed applicable credits in prior accounting periods, a complete solution should include the ability to amend previous returns with claims for the ERTC that should have applied.
Some accounting firms may still be catching up on the intricacies of providing the information needed to support your claims for ERTC. In those cases, it can work to your benefit to ask that your tax preparers enlist the support of a tax-planning firm with the specialized systems that convert your records and raw payroll data into valid, business-sustaining tax credits. It is in your interests to investigate ERTC for your firm. With proper ERTC submissions, even the most modest sized companies may realize many tens of thousands of dollars in vital, tax-reducing tax credits.
