Employee Retention Credit: What You Need to Know About 2021 Changes

by Stokes & Company | Mar 8, 2022 | Taxes

The CARES Act brought about many changes for businesses, including alterations to the way in which employees are paid and incentivized. While these new changes were primarily designed to help businesses stay afloat during the COVID-19 pandemic, they also have serious impacts on your bottom line if you operate as an employer. In this blog, we’ll describe that impact, and cover some new procedures you’ll need to follow for filing this year.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) was one of the several tax provisions enacted in the recently passed Protecting Americans from Tax Hikes Act (PATH), or as it’s more commonly known, the CARES Act. This provision helps employers offset the costs associated with retaining current employees—which means big news for small business owners. Through this refundable tax credit, eligible employers could recover 50 percent of up to $10,000 in wages paid to their employees after March 12, 2020, and before January 1, 2021.

How did the Employee Retention Credit change in 2021?

The most significant change to the Employee Retention Credit came about last year, when changes were made to the definition of a key term of eligibility. Under the old system, employees needed to work at least 26 weeks within one year (12 weeks with the same employer) to qualify for this credit, but new tax laws have redefined employment to reflect what’s commonly referred to as 30-day services; if an employee works fewer than 30 days within one calendar year, they may not meet all requirements necessary for qualifying. Another change that would impact tax credits is employers can now offer more than one month of paid time off, up from just three days.

New Filing Procedures

Following Notice 2021-49, tax filing procedures for tax returns that are able to qualify for employee retention credits for the 2021 tax year have changed. Contact us to discuss how this might benefit you. Specifically, we’ll discuss the Timing of Qualified Wages Deduction Disallowance and your options for filing:

Option 1: File the 2021 return that includes the ERC as is.

This means to go ahead and reduce qualified expenses for the ERC amounts for the 2021 tax return as we file, even though no ERC money has been received. Ideal prospects for this option include:

businesses who have cash and their future 2022 operational cash flow would not be affected by increasing the 2021 tax caused by the credits;
businesses who have a substantial net loss for 2021; and
businesses who received minimal ERC amounts, that would have minimal impact or change to the 2021 net profit.

Option 2: File the 2021 return without the ERC and amend once ERC money is received.

By doing this, you essentially treat the qualified expenses as if no ERC occurred for 2021, and once the ERC money is received, we will amend both the Company and personal returns as needed. Ideal prospects for this option include:

businesses that would have a substantial credit and the impact on recognizing the additional profit would be burdensome, and
businesses that do not want to pay additional tax without the cash from the ERC.

If you’re unsure of how this tax change will affect you, or the effects that the different filing options may have for your business, please give us a call so that we can schedule a time to discuss all of the impacts and how you can best position yourself for future success.

What is Employee Retention Tax Credit?

by Stokes & Company | Jan 11, 2022 | Uncategorized

Maybe you heard a rumor about a tax credit from the Federal government at a recent chamber of commerce meeting. Or you glanced at a news article about refundable taxes. Or maybe you dreamed about Uncle Sam sending you a check thanking you for keeping the economy afloat during a global pandemic.

Great news: it’s true, and it’s called the Employee Retention Tax Credit (ERTC). The Internal Revenue Service is willing to refund a part of your payroll taxes if your small business was negatively impacted by COVID-19.

As both a payroll service provider and an accounting firm, we understand the ins and outs of the IRS, and the valuable tax credits can have for a small business. And we want every small business owner to take advantage of this program because it’s been a rough couple of years. And you have really kept our economy going.

So, let’s figure out if your business is eligible, how much your tax credit could be, and how you can claim it.

What is Employee Retention Tax Credit?

It is an employer payroll tax credit for “qualified wages” provided to business owners to relieve some of the economic impacts of the COVID-19 pandemic. So, employers who paid their quarterly payroll taxes can get a refund of those taxes. And if they qualify for the credits, they’ll get a refund from Uncle Sam!

Here are the basics:

Who qualifies: Business owners who ran a business, conducted a trade, or provided a service in 2020 and 2021, including tax-exempt organizations.

What are the conditions for eligibility:

Experienced a government-mandated business closure or reduction of services due to COVID-19. OR Experienced a significant reduction in gross receipts.

Is this similar to a Paycheck Protection Program (PPP) loan? The ERTC has a similar intention, but the funds are either a refund or credit on your employer’s payroll taxes. If you’ve already paid your 2020 and 2021 payroll taxes, you will receive a refund. If you haven’t filed yet, you can apply for credit through your tax filing.

Can employers still apply for the ERTC? YES!

Disclaimer: As with all things related to the Internal Revenue Service, there are exceptions, special circumstances, and nuances that determine not only how much an employer could benefit from the ERTC, but also the funds, time frame, and reasons used to qualify. Be sure to refer to the most recent IRS guidance around ERC for more information. Employee Retention Credit | Internal Revenue Service

Nerdy background on creation of ERTC

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), which included the ERTC, to offset the impact of COVID-19 and encourage employers to keep full-time employees on their payrolls.

In late 2020 Congress approved the Consolidated Appropriations Act of 2021, which allowed for businesses who received Paycheck Protection Program (PPP) loans to claim employee retention tax credits, just not for the same expenditures used when applying for the PPP loan.

The Infrastructure Investment and Jobs Act amended the ERTC one last time to end eligibility at the end of 2021’s third quarter. ERTC can be claimed on the employer’s quarterly payroll tax filings from March 13, 2020, to September 30, 2021.

How much is the Employee Retention Tax Credit?

Since we’re talking about the government, the answer isn’t straightforward, but we’re simplifying it for you here:

Calendar Year 2020

For each qualifying employee wage paid, the employer can receive a 50 percent refund on a maximum of $10,000 per employee for all of Calendar Year 2020. This means employers are eligible for a total of $5,000 in tax credits per employee in 2020.

In 2020, if you qualify for the ERTC:

You employed 10 “average full-time” employees.

Each employee earned $10,000 in wages (& tips) for the calendar year.

You get a $50,000 refund.

(10 EEs x $5,000 ) = $50,000

Calendar Year 2021

For 2021, employers can receive a 70 percent refund on a maximum of $10,000 per employee per calendar quarter for the first three quarters. This means employers are eligible for a maximum of $7,000 per employee per quarter in 2021.

In 2021, if you qualify for the ERTC:

You employed 10 “average full-time” employees.

Each employee earned $10,000 in wages (& tips) each of the first three quarters

You get a $210,000 refund.

(10 EEs x $21,000 ) = $210,000

This is big money, people! No Whammies!

Unlike any math class you’ve ever taken, I’ve just given you the answer without showing you how to solve for it. And now, I’m going to walk you through arriving at the above solution. You might want to sit down.

What are the eligibility requirements for ERTC?

For 2020, the eligibility rules are straightforward. If your small business experienced a 50 percent reduction in sales revenue (as compared to 2019) during the calendar year, then you would qualify for the credit.

In 2021, the government changed all the rules.

Businesses are eligible based on performance during calendar quarters, not the entire year like 2020. And only the first three quarters of 2021 can be considered.
The reduction in sales revenue is 20 percent over the same quarter in 2019. This means that many employers who were not eligible for ERTC in 2020, might definitely be eligible for ERC in 2021.
Additional eligibility option where if you experienced one or more calendar quarters where operation ceased or was reduced due to Covid-related government mandates.

You’ll qualify for the ERTC if you meet either the reduction in sales revenue option OR the government-mandated decrease in operations in 2021.

Does my small business qualify for ERTC in 2021?

2021	1Q	2Q	3Q
Reduction/Closure	Yes	Yes	No
Lost revenue > 20%	Yes	No	No
500 employees or less	Yes	Yes	Yes
ERTC Qualified	Yes	Yes	No

Max Credit is $7,000 per full-time employee per qualified quarter for the first three quarters.

But what do you mean by government-mandated reduction in operations?

This eligibility rule requires a bit more interpretation to fully understand if your business meets it, and that’s where your payroll provider or certified public accountant (CPA) can provide some much-appreciated guidance.

Government mandates include, but are not limited to:

All federal mandates
Limited State of Emergency Orders from a Governor’s Office
Municipal, County, or State Executive Orders
Mandates from Health Directives, such as County Health Departments

These mandates stopped or limited your business operations in some way. Possibilities include:

Reduced hours of operation, i.e. bars having to close at 10 p.m. when they’d normally be open much later
Reduced capacity orders, i.e a retail furniture store that could only allow 15 people in their store instead of a normal capacity
Suspension of travel and meetings, i.e.(like a company who was not allowed to attend trade shows or large group meetings
Partial suspension of operations: if you had serious supply chain issues or were unable to secure certain products you needed to keep your business going.

If you’re reading this and you had supply chain issues and would like to talk through your specific situation, you can book time with our team to discuss your options..

What are eligible wages?

In qualifying quarters, eligible wages are all wages and health insurance benefits paid to an employee working for a small business. This does include tips paid out through payroll.

Eligible wages for large employers are wages and health insurance benefits paid to an employee when s/he was not working due to government-related reductions of services or closures. Whirks’ helps small business owners. If you are a large business owner, please contact your accounting firm, CPA, or payroll provider directly for specific details on your eligibility.

How does the IRS define large and small businesses for ERTC qualifications?

In 2020, the IRS defines small businesses as those with 100 or fewer average full-time employees.

In 2021, the IRS increased the size of a small business to those with 500 or fewer average full-time employees. Large companies have more than 100 employees in 2020, and more than 500 in 2021.

Oh wait! What does the IRS mean by “average full-time employee”?

Full-time employees work at least 130 hours per month. Add all the employees that worked more than 130 hours per month and divide by 12; this is your average number of full-time employees and how to determine if you are a large or small business.

Keep in mind, that if you have part-time employees, and meet the eligibility requirements for ERTC, their wages count in your credit calculation. But if you’re on the line between the IRS’ definition of small or large business, be sure to do the math to ensure you don’t exceed the average full-time employee rule.

If my business qualifies for the ERTC, how do I claim it?

The ERTC is claimed on IRS Form 941 when filing your business’ quarterly payroll tax.

Can a business retroactively claim the employee retention tax credit they have already filed their 2020 and 2021 quarterly payroll taxes? YES!

Businesses can file an adjusted employment tax return via IRS Form 941-X.

Businesses can claim the ERTC by filing Form 941-X within three years of filing the original tax return for the same quarter. So, if you realize you qualify for the ERTC for any part of 2020, you have until December 2023 to file an amended return and receive the credit. If you need to file an amended return for the second quarter of 2021, it will need to be filed no later than June 30, 2023.

It’s Time to Grab that Dough!

So the federal government actually created a way to pay you back for continuing to run your small business through a once-in-a-lifetime pandemic. It wasn’t a COVID-induced fever dream.

The Employee Retention Tax Credit is available for business owners who lost revenue directly due to the COVID-19 pandemic or from government-mandated suspensions of business activity. For businesses who qualify under the 2020 rules, refunds of up to $5,000 per employee are headed your way. And for businesses who meet the 2021 ERTC rules, you are looking at credits of up to $21,000 per employee!

As with all tax endeavors, the mental gymnastics to determine if your business qualifies for the ERTC can be strenuous, but REALLY worth it.

Your payroll provider should have calculated the amount of your credit and filed the right forms with the IRS. But, if they haven’t and you don’t have the time or headspace to manage this, Stokes & Company CPA’s are here to assist you. With four locations across the Upstate and Western, NC to serve you, make your appointment today for your business accounting needs!

Need Payroll help? Visit our sister company, Paysmart Payroll today.

Leveling Up: How to Plan For Business Growth

by Stokes & Company | Nov 22, 2021 | Accounting and Business

Leveling Up: How to Plan For Business Growth

By Stephen Stokes

For many of us, the idea of substantial business growth is something that we all want; it’s what we spend our days working toward. But for business owners and entrepreneurs, the question is this: If scaling up is something that you really want, is it something that you are planning for? After all, the worst time to try to get a bank loan is when you need money, and similarly, the worst time to plan for growth is when you’re in the middle of growing. It’s important that business owners realize that the best time to start planning for your next stage of growth is now, before you’re in the thick of it and caught up in being reactive, rather than planning proactively and strategically.

With that in mind, let’s talk about how to prepare for your next stage of business expansion. Here are six tips that will help you get your business in order and ready to grow.

Gather your internal team

As one of your first major strategic moves, identify the team from within your company that is going to help lead the company to success. Growth — especially exponential growth — can be burdensome, have a lot of moving parts, and take more time to manage than you will have to spend. Don’t try to do it all yourself; instead, find the leaders on your team who are well-equipped in different areas — and especially those in which you have blind spots! Doing so may not help ease the burden completely, but it will spread it around to make it more manageable.

Build your external team

Once you have an internal team identified, look outward to build your “dream team” of professionals that can help you along the path. In most cases, these will be experts in high-focus fields — like bankers, lawyers, accountants or advisers. Putting this team together — from identification to interview and even up to some sort of business agreement — is extremely important because in scaled growth, where revenues and customers are growing faster than your expenses, the last thing you need to be doing is deciding who will manage some of the most important facets of your business. Take the time to put all the players in place now.

Outsource strategically

Similar to the above, look at the gaps in your team — internal and external—and make some calls on what work could be outsourced. While many business owners are used to doing everything themselves or with small teams, the reality is that when in growth mode, your focus needs to be on growing — not on the building blocks that can be done faster and cheaper by someone with that specific expertise and focus. For example, as a company that serves as an outsource arm for many businesses in the areas of accounting, bookkeeping or payroll, our goal is to remove the weight of heavy subjects and focus areas like compliance or taxes so our clients don’t end up spinning their wheels in complex areas, and can instead spend that time and energy gaining traction in other areas.

Some examples of what may fall into this bucket would be human resources, information technology, marketing, and bookkeeping — all necessary areas of your business that probably don’t require a large amount of time or money to make a significant impact. The bottom line? Examine each area, and how outsourcing could impact your bottom line. Then, make your decision based on real numbers and real information.

Establish an operating system

It’s likely that you already have some operating systems and processes in place in your business, especially if you’re at the point where your business looks like it may grow significantly, soon. However, it’s far less common that business owners and entrepreneurs take the time to document those systems, the lack of which makes it incredibly difficult to replicate and scale. On the other hand, doing so can mean a quick handoff to a vendor or other team member when time is tight or you’re operating with a lack of focus. In our company, we have what is called the EOS —Entrepreneurial Operating System — where we hold quarterly and weekly planning meetings to assess and plan for the business. Not only will a system like this help you prepare for future growth, but it may also help you identify gaps in your business that you may not have found otherwise.

Budget for growth

Instead of rushing forward with the excitement of anticipated growth, take a minute and really look at your numbers. One reason to do this is to determine whether your business is simply growing or if it is actually scaling; the former meaning that while your revenue is on the upward trend, your expenses are sliding up alongside it. In a scaling mode, however, your revenue is on the uptick, but your costs are staying steady, slowly increasing or even decreasing, making the margins much larger and growth much faster. Determining which type your business falls into will help you identify patterns and trends, and determine how much you’ll need to plan for financial, resource and staff growth.

Establish necessary KPIs, and watch them

When you’re a small business, it’s easy to keep track of all the major metrics in your business; there aren’t a lot of people involved, and you can probably get a progress report with a quick email or chat in the hallway. When you are growing, on the other hand, you will have more people involved, and more things headed in different directions, but you still need to be able to pull that information together at any time. KPIs — or Key Performance Indicators — are goals that you set (after a bit of review and focus) to help you determine where the company is going, and how it will get there. At Stokes & Company, we call these “scorecards,” but regardless of what you call them, they all need to accomplish the same thing: provide a dashboard of all major business metrics to let you know, at a glance, where you stand. Oftentimes this is a sales goal, a production goal, or even follower growth, but whatever measurements you choose, make sure they are important to your business and that you are treating them as such.

Whatever stage of business you are in, keep in mind that the world is full of other businesses and specialists who are there to help, and many business mentors who have been there and can help you along the way. Don’t be intimidated by growth; embrace it. And prepare for it, so that when it happens, you are well-equipped to run with every opportunity in your path.

With more than 18 years’ experience in the accounting industry, Stephen Stokes is a licensed certified public accountant who specializes in small business accounting, business management and consulting, mergers and acquisitions, and more. Stokes is president of Stokes & Company, an accounting, payroll and tax services firm with four locations across Upstate South Carolina and Western North Carolina.