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How to Apply for the Employee Retention Credit and get a Refund for Your Business

stack of sticky notes with "tax credit" written on top

Did you have payroll expenses last year? Will you have payroll expenses first or second quarter of 2021? Was your company struggling during the pandemic and is it continuing to struggle? If so, it literally pays to be sure you are receiving all the COVID relief you are eligible for.

Who is eligible for the ERC

The Employee Retention Credit (ERC) is a refundable credit for qualified wages.  Recent changes to the rules for the ERC now allow companies that had PPP loans to also claim this payroll tax credit.  This is a significant change in the legislation, and many employers who did not originally qualify for this credit now do.  The credit can result in an outright refund to your company of up to $5,000/employee in 2020 and $14,000/employee in 2021!   

To be eligible you need to either have a decline in gross receipts to meet a gross receipts test or have a partial suspension of operations from any calendar quarter in 2020 (or 2021 Q1 or Q2) due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19.

In 2020, if you have under 100 full time employees (based upon 2019 measurements) then employees paid for working or not working can qualify. In 2021, if you have under 500 full-time employees (based upon 2019 measurements) then employees paid for working or not working can qualify. If you are above the employment levels listed for 2020 or 2021, then the credit is only available for employees who are not providing services.

To claim the credit, you will need to file an amended 941 for the applicable period.  Then you will literally get a refund from the IRS.

For credits related to 2020 wages the entry should be made on the books as of the period in which the wages occurred.  For credits related to 2021 wages, the credit should be recorded in 2021.  Many companies are applying now for the credit for 2020 wages…so its not too late!  If that’s the case for you – make sure you make the related entries on last year’s books.  Once the amount is determined the credit is recorded as a receivable on the balance sheet and other income on the income statement.

The calculations for this credit can be complicated as the wages that qualify for PPP forgiveness cannot be the same wages that qualify for the ERC.  You need to ensure you are not “double dipping” while also maximizing the amount of the credit you can take.   For example, if an employer used their forgiven PPP loan monies to pay for a particular employee’s wages, you can’t receive the tax credit for those same wages through the ERC.  The calculations become even more involved when care is taken to maximizing the amount of ERC you get while ensuring that no double dipping has occurred.

Do you qualify for PPP round 2

With the Paycheck Protection Program’s round two under way and many company’s forgiveness applications for round one accepted,  business owners are wondering if they qualify for round two as well. You qualify for round two if you used the full amount of your round one loan for authorized uses, can demonstrate the required reduction in gross receipts, and have no more than 300 employees.

Keep in mind that if you are applying for both the 2021 ERC and round two of the PPP, you need to ensure you are not “double dipping” while also maximizing the amount of the credit you can take.

Please reach out to us for support on the accounting for these relief programs.  The staff in the Accounting Solutions Group at Wegner CPAs is happy to help you navigate the accounting for these transactions as well as support you in determining if you qualify.

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