Covid-19 has affected many people, and because there was a need for support to the affected, the Taxpayer Certainty and Disaster Tax Relief Act was made a law on 27th December 2020.
Section 206 of this Act grants an employer to take the employee retention credit regardless of whether they had received a protection program paycheck loan. The employers who qualify are supposed to change the employees’ tax returns rules to claim credit and ask for a refund. The ERC is only applicable to salaries paid after the month of 12th March 2020.
Background information about the Employee Retention Credit for the year 2020
The CARES Act gives the private sector employers the mandate to take a refundable tax credit equal to 50% of the wages paid after 12th March 2020. This is totally against the existing social security tax law. Each employee is entitled to $10,000.
Employers are only qualified if they meet some conditions, for instance, if their operations were fully or partially put on hold due to the rules set in place by the government following the tension brought about by Covid-19. An employer is also eligible if their gross receipt went down by 50% compared to the years before covid-19. The amount of money spent on health care by the employer determined how much credit increase they received.
The enacting of the CARES Act in 2020 March granted the employers to either take the ERC or PPP loan, with businesses picking the PPP loan rendered not eligible for the ERC. However, this restriction is no more.
Presently, an employer getting ERC can as well borrow a PPP loan. However, the employer must ensure that the wages they are using are not included in the payroll costs to ask for ERC and PPP loans. In summary, any wages that the employer paid using the PPP loan and about to be forgiven or are already discounted cannot be used to claim ERC. You can only use this wage to claim either ERC or PPP loan but never both.
Below is the IRS guidance on how these programs are provided and advises the employers to change the present employment tax returns for every program.
IRS guidance was released on 22nd January with its 941 Form available for the 4th quarter by 31st January. In this guidance, the 4th quarter qualifies wage amounts for both the 2nd and 3rd quarters, with the results reported on either line 111c or 13d. The original 4th quarter with form 941, together with other ERC wages, are eligible for payment on the 4th quarter.
Employers are also given the month of June, September, and December to file their new returns or ask for a refund with Form 941-X.
The extension of the Employee Retention Tax Credit and its revision for 2021
This Act has changed the Employee Retention Tax Credit from the beginning of January to the end of June of 2021. The credit was now 70% when it was 50% earlier for the qualified salaries.
The wage limit, which was initially $10000 for an entire year, is now given quarterly totaling the employee wage maximum credit for 2021 to $14000. The employers only qualify if their gross wages have been reduced by 20%. The records of the earlier quarters can also be used to tell whether they qualify or not.
For the year 2021, qualification is extended to other institutions such as hospitals, universities, and medical care providers. This new routine also applies to new employers who never existed before 2019.
Initially, the CARES acts only permitted employers with 100 employees and above to receive wages paid to the employees that received no service. On the contrary, the employers with less than 100 employees received credit for both times worked and time off. Presently, this rule is revised to 500 employees for this year.
This year, the employers can also claim ERC for both 1st and 2nd quarters after filing their tax returns and limiting their tax deposits. Those who have 500 or fewer but full-time employees in the year 2019 can access advance credit on Form 7200 upon reducing deposit due to Covid-19.
Points to know about ADP tax filing
Any advance payments claimed through the IRS Form 7200 must be combined with the ERC and other credits that the employer qualifies for on the IRS Form 941, which is the employer’s quarterly federal tax return.
As an ADP client, you have to notify the ADP of all the 7200 Forms submitted to the IRS. If the employers, for some reason, fail to comply with this, they will receive an underpayment because of the IRS advance payment and ADP. Moreover, there will be interest charges and penalties from IRS.
As an employer, find the best legal and tax advisors to advise your firm on whether you qualify for ERC with detailed information on the different rules that apply for 2020 and 2021. The above information is only giving an overview but not detailed information.