Because of a provision in the Infrastructure Investment and Jobs Act, which was passed on November 15, 2021, most employers will no longer be able to claim the Employee Retention Credit for wages paid after September 20, 2021. However, eligible employers can continue to take advantage of this credit for the remainder of the year 2021 and the first three quarters of 2022.
In 2021 and 2022, will employers be able to submit applications for the Employee Retention Credit?
Employers that qualify for the credit can keep submitting claims for wages earned between March 12, 2020 and October 1, 2021, as long as the claims are submitted before the statute of limitations for the Form 941 is reached. These modified employment tax returns must be submitted by the due date of April 15, 2024, for credits in the year 2020, and by the due date of April 15, 2025, for credits in the year 2021. If you have not yet established whether or not you meet the criteria for a qualified employer, we will be happy to assist you in doing the necessary analysis.
Is it Possible to Receive the Employee Retention Credit during the Fourth Quarter of 2022?
It is only possible for qualifying recovery startup enterprises to continue to claim the ERC for the fourth quarter of 2022. In order to be eligible, these companies must have begun operations after February 15, 2020, and their annual gross sales must have been less than $1,000,000 for the three years immediately prior to the quarter for which the credit is claimed.
What Would Happen If an Employer Stopped Making Payments on Employment Taxes During the Fourth Quarter of 2022?
In preparation for the ERC for the fourth quarter of 2022, some employers ceased sending in their payments for employment taxes. Employers are required to make contributions to payroll taxes that should have been paid in the fourth quarter as soon as possible, unless they are using credit carryforwards from prior quarters to fund these 4th quarter payroll deposits. In this case, employers do not need to make these contributions. Notice 2021-24 exempts employers from paying a penalty for eligible wages that were received in 2021. However, due to the retroactive repeal of these rules, any wages earned in the fourth quarter of 2021 will no longer be considered qualifying wages; as a result, this notification is irrelevant.
Because of the retroactive nature of the legislation change, the Internal Revenue Service has not issued any advise waiving the penalty for failing to make a deposit. Taxpayers who have been assessed penalties for failing to deposit these taxes on time should submit a request to have those fines waived if they can demonstrate that there was a justifiable explanation for their failure. Despite the fact that we are unable to give any promise that these petitions would be granted, those taxpayers who deposited any back taxes as soon as they became aware of the change in the legislation had a greater chance of having their claims accepted.
How Private Equity Funds Can Increase Their Return On Investment Through Employee Retention Credit?
Private equity (PE) funds now have the ability to produce income for their eligible portfolio firms thanks to the Employee Retention Credit (ERC), which directly boosts the return on investment for shareholders of these funds.
The Earned Income Credit (ERC) is a credit against employers’ payroll taxes that can be refunded, and it is accessible to a large number of businesses that paid their employees in 2020 and 2021 despite dips in revenue or disruptions to their operations.
Over the course of the past year, Cherry Bekaert has collaborated with a large number of private equity funds to assist their portfolio firms in quantifying and obtaining the financial benefit that is rightfully owed to them.
The following criteria determine whether an applicant is eligible:
- If the employer sees a decrease in gross receipts in any calendar quarter of 2020 and/or the first three quarters of 2021 as compared to calendar quarters in 2019, the following applies: OR
- Providing evidence that directives issued by the government restricting commercial activity, travel, or group meetings directly hampered the operation of the company (including some supply chain disruptions).
The good news is that portfolio firms controlled by private equity funds might not have to be aggregated when the number of workers or gross receipts requirements are applied.
To establish whether or not a company is eligible for ERC funding, we are currently engaging in complementary scoping conversations.
How to Make Money Off of the Employee Retention Credit in 4 Different Ways (ERC)?
The Employee Retention Credit, often known as the ERC, is a stimulus that is favorable to small businesses; however, this is only the case if the credits deliver direct cash flow to the employer. Due to the fact that the government is aware of this fact, it has established four distinct channels through which an eligible employer may realize the benefits: an advance credit, an immediate benefit, a quarterly benefit, and a benefit realized through the filing of an amended employment tax return. These many approaches need to be assessed, and then small enterprises should select the one that is both simple and beneficial to their operations.
An Advance on a Credit Balance
By completing Form 7200 and claiming a credit of no more than the average quarterly wages received during 2019, small qualified employers are able to reap the advantages of an ERC even before qualifying wages are paid. This is made possible because of the ERC. Before they may make a request for an advance, employers are required to lower their employment tax payments in expectation of a credit.
An employer’s Social Security wages are used to calculate an employer’s average quarterly wages. This calculation is done without taking into consideration the Social Security wage base. The amount is arrived at by taking the total amount that was reported on line 5c of all of the Forms 941 that were submitted for 2019 and dividing that total amount by four. There is a separate set of rules that apply to seasonal employers, as well as to employers that did not exist in 2019 or who did not exist for the entirety of the quarter during the time that was utilized for the computation. The aggregated wages of all employees at one employer are used to calculate the quarterly average employer.
The Internal Revenue Service receives the completed Form 7200 through fax (IRS). As soon as it is received, it is combined with the processing of the other tax forms, and it takes at least one month for a check to be mailed to the employer. Form 7200 needs to be submitted before the end of the quarter that corresponds to the credit that is being claimed, and the amount of credit that is being claimed on Form 7200 needs to be reported on Form 941 for that quarter. It is possible that this advance credit will be more than the ERC that the employer would be entitled to receive for the quarter.
It is the responsibility of an employer to reconcile their payroll tax due, deposits made, and credits claimed using the quarterly Form 941. This may result in the employer being obliged to reimburse monies to the government at the conclusion of a quarter.
A Credit That Is Used Right Away
The reduction of federal payroll tax payments that the employer would have to make in any other circumstance is the quickest and most recommended approach to monetize the ERC. Therefore, as employee pay is determined and federal income and employment tax withholding and payments would otherwise be deposited through EFTPS, the Electronic Funds Tax Payment System, the employer should reduce those deposits for the amount of credit earned on wages paid or to be claimed as an advance credit.
This results in an instant advantage to one’s cash flow that is equivalent to the amount that, under normal circumstances, would have to be paid to the IRS. It is important to keep in mind that although while the ERC is a refundable credit based on wages and that it balances an employer’s Social Security or Medicare taxes, the offset might actually be for any and all taxes that would otherwise be deposited. The payroll tax liabilities of an employer, as well as any deposits made or credits claimed, must be reconciled on a quarterly basis using Form 941.
A Benefit Paid Every Quarter
Before claiming the credit, some qualified employers prefer to calculate the amount of the credit to which they are entitled. This involves taking into account gross wages and allocable health care expenditures that are not utilized for CARES Act PPP loan forgiveness. These employers have the option of submitting their credit claim using either the Form 941 or the Form 7200.
Form 7200 needs to be submitted before the end of the quarter that corresponds to the credit that is being claimed, and the amount of credit that is being claimed on Form 7200 needs to be reported on Form 941 for that quarter. Employers have the option, presented on Form 941, of either claiming a refund for any overpayment or using the refund as a credit to the employment tax returns for the subsequent quarter. An immediate tax gain can be achieved by the employer by reducing the amount of payroll tax deposits that would otherwise be paid during the future quarter, provided that the overpayment is claimed as a credit on the employment tax return for that subsequent quarter.
An Occupational Tax Return That Has Been Amended
In the event that an employer has previously submitted their Form 941 for a given calendar quarter, the employer has at least three years to submit a Form 941-X, which is an updated Form 941, in order to claim the credit. Form 941-X can be submitted at any point before the refund statute of limitations for that year’s quarterly employment tax returns has run its course and become inapplicable. In most years, the statute of limitations for a quarterly Form 941 will run out on April 15 of the third year after the year in which the quarterly Form 941s were due, unless the taxpayer and the Internal Revenue Service (IRS) have reached an agreement to extend the statute. This is the case even in the event that the taxpayer and the IRS have reached such an agreement. This term has been extended to five years for credits claimed on wages earned after June 30, 2021, and before January 1, 2022, as a result of the American Rescue Plan of 2021, which was passed into law on March 11, 2021.
Penalty Relief
In light of the fact that taxpayers and their advisors may unintentionally misapply the rules, Congress stipulated that penalties for failing to deposit payroll taxes should be waived. This decision was made in light of the fact that taxpayers are given a wide variety of options for how they can claim the ERC. This credit is applicable to 2021 ERCs according to Notice 2021-24, which extends Notice 2020-20’s application to 2020 ERCs. If the amount of taxes that were not timely deposited is less than or equal to the employer’s anticipated ERC reduced by credits available for emergency paid sick and FMLA leave, then these notices eliminate the penalty. However, this is only the case if the employer did not seek an advance credit for the same amount.
Cherry Bekaert is standing by and ready to lend a hand to you in the process of claiming the ERC. We have a proprietary technology platform that enables us to provide a deliverable that is audit-ready. With this platform, we are able to document your status as an Eligible Employer, calculate the credit based on your wage data, maximize the wages that are treated as Qualified Wages, and distribute PPP loan forgiveness proceeds across the eligible payroll quarters.