Mistakes Employers Should Avoid When Claiming COVID-Related Tax Credits by Andrew Leonard, CPA
Posted on August 19, 2021
Just as the IRS issued new guidance concerning the Employee Retention Tax Credit (ERTC), Congress is considering a proposal to end the program that would continue offering qualifying taxpayers as much as $7,000 in refundable tax credit per employee each quarter of 2021. Time is truly of the essence for employers to take advantage of this very generous tax break, even retroactively to 2020, and to do so with exacting precision.
Congress introduced the ERTC under the CARES Act in March 2020 to encourage businesses and not-for-profits to keep workers on payroll during the pandemic’s unprecedented interruptions to normal operations. At the time, the credit was equal to $5,000 per employee through Dec. 31, 2020, and businesses had to decide whether to use the ERTC or apply for a forgivable loan under the Paycheck Protection Program (PPP). Subsequent legislation extended the availability of the ERTC through the end of 2021, increased the maximum available credit to $7,000 per employee per quarter in 2021 (or $28,000 per employee for the year), and expanded eligibility to include recipients of PPP loans and businesses whose quarterly gross receipts during any quarter in 2021 fell a mere 20 percent from the same quarter in 2020 or 2019.
All told, an eligible business or nonprofit with 50 employees could receive a tax credit equal to $950,000, which includes $250,000 for 2020 and $700,000 for the first two quarters of 2021. Should the program remain in place, those qualifying businesses can continue claiming the ERTC through the end of 2021, which would increase their total credit for both years to $2.35 million. Because the credit is refundable, amounts employers paid in excess of employees’ Social Security taxes would be treated as overpayments and refunded to employers or used to offset employers’ remaining tax liabilities. Additionally, when eligible employers, including recovery startup businesses that began operations after Feb. 15, 2020, do not have sufficient employment taxes to cover their employee retention credit on deposit with the IRS, they can still receive the refundable portion of the credit.
Businesses claiming the ERTC need only complete IRS Form 941, Employer’s Quarterly Federal Tax Return, for each eligible quarter to receive reductions to payroll taxes and cash refunds for credits in excess of payroll taxes. However, due to the nuances of the law and the various changes made to application guidance, taxpayers should work with CPAs and experienced tax preparers who recognize the nuances of the laws and can ensure taxpayers avoid costly mistakes. Following are some of the important points the IRS reminds taxpayers to consider when claiming employee retention tax credits.
- Use IRS Form 941 to claim the credit and report advanced credits received. If a business received the advance payment requested, it must reconcile it on Form 941 by reporting the advance payments received and claiming the credits for which it is eligible. If employers fail to do this, they may receive a balance due notice from the IRS. In addition, employment tax returns businesses filed without reporting credits to which they were entitled will need to be amended (Form 941-X) to claim those eligible credits.
- Use IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request the advance payment of credits.
- Inform third-party payers, such as payroll service providers, reporting agents and certified professional employer organizations (CPEOs), they requested and received an advance payment of credit.
- Use the fractions of cents line on Form 941 correctly when reporting employees’ shares of Social Security and Medicare taxes.
- Only claim ERTCs for which you are eligible and ensure that the credit claimed does not exceed statutory limits.
- Be accurate when completing amended tax returns to claim the ERTC. A business amending a return to claim additional employee retention credits must complete the lines that relate to qualified wages for the that credit and qualified health plan expenses allocable to those wages, if applicable.
- Double check for missing or inaccurate information before submitting a claim. For example, ensure the form includes an accurate employer identification number (EIN), signature and selection of the correct calendar quarter.
While it may be complex and time consuming to apply for the ERTC, it behooves all employers to evaluate their eligibility under the guidance of experienced advisors to ensure their companies apply for and receive the appropriate benefits of the government stimulus program.
About the Author: Andrew Leonard, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or firstname.lastname@example.org.