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Important “to do” item before filing Q1 Form 941

numbered to do list

Businesses and organizations that have suffered a decline in gross receipts may qualify for an employee retention credit (ERC). Recent legislation has extended the ERC through Q4 2021.

For 2021, your business operations must be either fully or partially suspended by a COVID-19 governmental authority shutdown (mandate) for any quarter in 2021 OR gross receipts are less than 80% of gross receipts for the same quarter in 2019. This is a refundable credit, meaning you get cash back for this program.

The easiest test to meet is the gross receipts test

To determine the gross receipts test, a business/organization should compare Q1 2021 with Q1 2019 gross receipts. Every business/organization should run this analysis prior to filing their Q1 Form 941, which is where the ERC is claimed. If the gross receipts for Q1 2021 are less than 80% of gross receipts in Q1 2019, then the business/organization will qualify.

Ex: Gross receipts in Q1 2021 are $2,000,000, Gross receipts in Q1 2019 were $3,000,000. This business/organization has met the test and qualifies for the ERC.

For 2021, the ERC is 70% of the qualified wages paid to the employee plus the cost of health benefits provided to the employee. This is capped at $10,000 of wages and a credit of $7,000 per employee per quarter. The total credit could be $28,000 per employee if an organization qualifies for all four quarters.

Here is an example of how significant this credit could be for an organization.

  • 50 full-time employees are paid over $10,000 of qualified wages in Q1 2021.
  • 20 part-time employees are paid $5,000 of qualified wages.
  • The qualified wages in total are 50 x $10,000 + 20 x $5,000 = $600,000 qualified wages.
  • The credit is 70% of qualified wages or $420,000. This would be the refund issued to this business/organization via the Q1 Form 941.

If your business/organization qualifies for the ERC in 2021, the information needed to calculate the Q1 2021 ERC for most businesses/organizations is:

  • Payroll by employee for Q1 2021.
  • Health insurance (if applicable) by employee for Q1 2021.
  • Paycheck Protection Program (PPP) Loan (if applicable), loan amount, deposit date, and payroll from date of deposit through March 31, 2021. You cannot use the same wages for PPP loan forgiveness and ERC.

There are some business/organizations that will need additional information if they have certain wages credits such as Family First Coronavirus Response Act (FFCRA) credits, Work Opportunity Tax Credits (WOTC) or research & development (R&D) credits.

Additional analysis may be needed for some businesses/organizations because you cannot use the same dollar for the ERC as you are using for PPP loan forgiveness or the programs listed above.

If you would like additional guidance issued by the IRS, you can refer to Notice 2021-20 and the IRS website for frequently asked questions. Note that these items focus on 2020 ERC and do not provide a lot of guidance on 2021 credits.

The ERC is a very beneficial program for businesses/organizations that have suffered gross receipts declines.

Please contact us if you would like assistance with these calculations.

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