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How To Report ERC On Your Tax Return: A Step-by-Step Guide

Understanding the processes surrounding Employee Retention Credit can be overwhelming. Because it’s such an important program for you and your business, it’s essential that you understand the impact of ERC on your taxes and how to account for your refund amount.

Let’s take a look at the most commonly asked questions regarding Employee Retention Credit and its impact on your taxes.

Understanding ERC and its Impact on Your Taxes

Employee Retention Credit was a provision laid down by the U.S. government in order to support businesses during the Covid-19 outbreak. The program was implemented under the Coronavirus Aid, Relief and Economic Security (CARES) Act to help businesses retain their employees, even if their business was forced to close or reduce hours due to lockdowns and restrictions.

This has helped many small businesses to reduce their tax implications as it has allowed them to keep the same number of employees and earn credit against each, even if they were unable to work during that time.

The IRS sets out certain criteria which businesses must meet to gain the refund, and if they are eligible, they are able to set a tax deposit against their obligation to reduce the overall amount of tax due.

You will likely need to adjust for your ERC credit on your 2020 and 2021 tax returns, as the wages credited back to you through the ERC program are no longer considered expenses for those years, and thus your business may incur some tax liability. The net effect of obtaining this credit you are entitled to far outweighs any impact this would have on your 2020/21 taxes. You should always consult a tax professional when considering the impacts of ERC on your business finances.

What is the Employee Retention Credit (ERC)?

Employee Retention Credit (ERC) is a refundable tax credit that is provided to employers who retained their employees during the Covid-19 pandemic. It’s a refund that was created under the CARES Act as a way to reimburse employers who retained their staff, even if their business was forced to reduce hours or close completely due to Covid-19 enforced restrictions which had an impact on profits.

There are certain criteria to meet before you can claim ERC:

  1. The business must have been operating in 2020 and/or 2021 with W2 employees.
  2. The business can show a significant decline (50% or more in eligible quarters in 2020, 20% or more in eligible quarters in 2021) in revenue.
  3. OR the business must have experienced a nominal impact to a segment of their business (defined by the IRS as >10%) due to a full or partial closure or reduced operating capacity due to government orders and restrictions.

For Q2, Q3, and Q4 of 2020, an employer can claim up to 50% of each employee’s wages back, with a cap of $10,000. So that’s the potential to earn $5,000 per employee, even if they didn’t work during the lockdowns.

For Q1, Q2, and Q3 of 2021, an employer can claim up to 70% of each employee’s wages back, with a cap of $10,000 per quarter. So that’s the potential to earn $7,000 per employee, per quarter, bringing the total maximum amount eligible per employee to $26,000.

Important Dates and Deadlines for ERC Reporting

Dates can be confusing, but they are crucial to ensure you make the most of your ERC refund. You can also avoid tax penalties by understanding the dates clearly.

Here are the most important dates for you to remember:

  • March 27, 2020: This is the date that the CARES Act signed off the ERC.
  • February 15, 2020: If your business opened after February 15 of 2020, there are special ERC provisions called the Recovery Startup Business (RSB) Credit, which we can assist in filing for you. Many businesses are automatically qualified for the RSB.
  • December 31, 2020: Initially, the ERC was due to end on this date. However, extensions to restrictions meant that the scheme was extended further.
  • April 15, 2024: This is the first end date for ERC filings for eligible quarters in 2020. There will be no further ERC filings accepted for 2020 after this date.
  • April 15, 2025: This is the first end date for ERC filings for eligible quarters in 2021. There will be no further ERC filings accepted for 2021 after this date.

Although these dates were a true reflection of the circumstances at the time, the economic climate and legislation are always changing, so it’s a good idea to consult a tax professional or ERC Benefits advisor soon to ensure your claim is submitted during this time frame.

How the ERC Affects Your Tax Liability

Employee Retention Credit provides a financial cushion for a business if they’ve struggled through the Covid-19 pandemic due to the many restrictions put in place. The refund acts as a credit towards an employer’s tax liability and reduces social security taxes based on the number of employees that the employer continued to pay throughout the year.

The ERC can be paid at a value of 50% of each employee’s qualifying wages for the year 2020. This is capped at $10,000, so there’s a possibility for a $5,000 payout per employee for that year. This acted as an incentive for employers to keep their staff on and pay them throughout the year. The more employees that retain their positions, the more the employer would receive from the tax bill.

If the ERC payment amount is higher than the employer’s Social Security Tax bill, then the excess is automatically paid out to the employer, giving a direct refund for the funds paid out on wages.

Common Mistakes to Avoid When Reporting ERC

While reporting on ERC figures on your tax return can be complex, any mistakes can lead to delays in your refund or receiving less of a payment, so it’s essential that you get this right!

If you’re concerned about filing and including the right information to receive your ERC refund, then it’s advised to consult a tax professional before submitting your return.

Here are some of the most common errors made on tax returns that you need to avoid:

  • Don’t report on the same funds twice: You cannot use the same wages that qualify for ERC to claim other credits or refunds such as the Work Opportunity Credit or the Family First Coronavirus Response Act (FFCRA) paid leave credits. Wages covered by PPP loans also have to be accounted for, as those wages cannot be reimbursed by the ERC program. If you are flagged as ‘double-dipping’ this may affect the amount you receive and will put a mark against your name showing that you tried to claim twice. This may affect your future filing.
  • Gross Receipt Calculations: To qualify for ERC, you must show a significant decline in gross profits due to restrictions. If you miscalculate your receipts, then this could result in less ERC being paid, or not qualifying at all.
  • Health Plan Expenses Planning: You can include health plan expenses in your calculations. They are considered as wages and including these may result in a bigger refund if you haven’t reached your maximum eligibility.

Keeping Accurate Records for ERC Reporting

Planning for your ERC payment is essential to get the right amount as a refund. It’s important to start pulling together all the critical information and conducting a full audit of your accounts prior to filing to ensure you get the right amount back.

Make sure you maintain:

  • Your Payroll Records: These will show the total wages that you’ve paid out broken down by employee. You will also be able to keep track of healthcare plans this way.
  • Gross Receipts: Keeping on top of your receipts and understanding your gross income is a bonus when it comes to demonstrating your loss as a result of Covid-19.
  • Government Orders: If you were required to close due to Covid-19 restrictions then the government may have sent you documentation. You should keep hold of this to prove your inability to trade or travel.

How to Calculate the Amount of ERC

Calculating your ERC total can be a little difficult with all of the different factors involved. Here are a few things that you’ll need to consider:

  1. Are You Eligible? To be eligible, you need to prove that your business was forced to close or change its opening hours as a result of Covid-19 restrictions. You will have to have retained your employees throughout the time and will need to show a definite loss in gross profits due to the restrictions.
  2. Which Wages Qualify? Qualified wages are those paid out to employees or as part of a healthcare plan over the quarter. You cannot use the wages to claim two separate credits.
  3. How Much Can You Claim? Once you have your qualified wage amount, you should multiply this by 50% for each employee. This should be a maximum amount of $5,000 per employee for 2020, and $7,000 per quarter for Q1, Q2, and Q3 of 2021.
  4. Consider Your Tax Liability: If the calculated ERC payment exceeds your share of Social Security Tax, then you will receive the remainder as a refund.
  5. Are You Recording Everything? It’s important to keep all of your records including receipts and payroll reports. This will help you prove your refund total to the IRS and avoid potential issues.

If you think about all of these points before filing your return, you’re less likely to come across any issues when filing and will be able to maximize your claim.

Seeking Professional Help for ERC Reporting

If you’re not confident with the ERC rules and regulations, there’s no substitute for a tax professional to give you peace of mind when dealing with the complexities of ERC. It’s advisable to seek the help of a Certified Public Accountant or an ERC Benefits advisor. We offer the knowledge and skills to file for ERC accurately and will help you get the most out of your claim.

We can:

  • Help you understand how much ERC you are eligible for.
  • Calculate your eligible wages.
  • Amend your 941Xs to create your claim.
  • Stay up to date with any changes in ERC requirements.

Updates and Changes to ERC Reporting in 2023

Due to the changes in Covid-19 restrictions throughout the pandemic, there have been continuous changes in the rules and regulations surrounding ERC.

Even in 2023, after the program has ended, the rules for filing are still changing. It’s important that you stay up to date with these changes to make sure you file correctly and make the most of your claim.

Some of the recent changes include:

  • The Extension of ERC: The credit was initially intended to expire in 2020, however, due to the extension of restrictions, the credit is available through Q3 of 2021.
  • Credit Rate Increase: The Taxpayer Certainty and Disaster Relief Act amended the credit rate from 50% to 70% of qualified wages for quarters 1, 2 and 3 of 2021.
  • Eligibility Adjustments: The American Rescue Plan Act (ARPA) initially extended the ERC program through the end of 2021. Later, the Infrastructure Investment and Jobs Act retroactively ends the ERC program as of September 30, 2021, except for recovery startup businesses, which remain eligible through December 2021.

The changes are subject to change so it’s essential that you file at the right time to claim your full entitlement.

Understanding the Legal Implications of ERC Reporting

When claiming ERC, you must stay within the current tax laws. Any attempt to claim more than you are owed or amend figures to make a false claim may result in a penalty or have legal consequences. You should always consider:

  • Penalties and Interest: If you report or file incorrectly, you may have to pay a fine or receive more interest to pay back. You may also be marked for further scrutinization in the future.
  • Audits: Any attempt to file falsely may mean that you are denied credits in the future or may have to pay the money back during an audit if you’ve been overpaid.
  • Legal Consequences: If your tax return is seen to be fraudulent, you may face legal action and your business may suffer the consequences.

To avoid any negative consequences, it’s crucial that all businesses understand ERC rules and regulations and focus on reporting accurately. You should consult an ERC Benefits Advisor or other tax professionals if you’re worried about any of the ERC changes or need help making your claim correctly.

Conclusion

Understanding the Employee Retention Credit and the best way to report is essential to claim your refund and support your business’s future.

It can be a daunting task, even with helpful aids in reporting and record keeping. It’s important that you try to stay up to date with the changes, keep your documents safe and secure and seek help from a tax professional if you’re not confident.

It’s worth reaching out to someone who knows everything there is to know about ERC, rather than file wrong and face negative consequences later.

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Ramjan