Payroll Tax Deferral - Retention Credit - S-Corps - Molen & Associates

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Employee Retention Credit

To help your small business, Congress created a lot of new tax-saving provisions due to the COVID-19 pandemic. Many of our clients own and operate S corporations and it is valuable to understand how these credits impact your business.

Perhaps you, too, would like us to help clarify which of the COVID-19 tax benefits the S corporation owner can use to put cash in his or her pocket. Below, we will discuss the Employee Retention Credit – how to determine if you qualify and how much you may qualify for. If you already know how the credit works and you are just looking for the ERC calculator, click here.

UPDATE 11-6-21: The employee retention credit will be terminated early as a result of legislation (H.R. 3684) that passed the House of Representatives late Friday and is headed to President Joe Biden’s desk to be signed into law. Known as the Infrastructure Investment and Jobs Act, the legislation was approved in the House by a 228–206 vote after passing the Senate by a 69–30 vote in August. making wages paid after Sept. 30, 2021, ineligible for the credit (except for wages paid by an eligible recovery startup business).

The ERC was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L. 116-260. The American Rescue Plan Act, P.L. 117-2, enacted March 11, made the ERC available to eligible employers for wages paid during the third and fourth quarters of 2021; however, H.R. 3684 would repeal the fourth-quarter extension. The IRS issued guidance on claiming the credit in the third and fourth quarters of 2021 (Notice 2021-49), but noted in that guidance that it is watching this legislative development.

 

Employee Retention Credit (ERC) Qualifications

Your business may qualify for a refundable payroll tax credit against the employer share of employment taxes. This credit is claimed on Form 941 for most businesses. So, if you use a payroll company, you may need to classify or reclassify wages in order to take advantage of this credit for the periods that you meet all qualifications.

Employers, including tax-exempt organizations, need to determine eligibility for the credit in 2 steps:

  1. Determine if the business qualifies for the ERC. Did they operate a trade or business during calendar year 2020 and/or and experience either a.) the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or b.) a significant decline in gross receipts.
  2. Determine which wages are eligible.

 

For eligible wages paid in 2020:

  • Gross receipts declined by more than 50% when compared to the same quarter in the prior year (Did the business experience a decline in revenues of more than 50% during Q1 2020 vs. Q1 2019, or in Q2 2020 vs. Q2 2019?).
  • Credit amount available: Covers 50% of qualified wages, including qualified health plan expenses, up to $10,000 in wages per employee annually and caps credit at $5,000 per employee annually.

For eligible wages paid in 2021:

  • Gross receipts declined by more than 20% when compared to the same quarter in the prior year -OR- in the immediately preceding calendar quarter.
  • Credit amount available: Covers 70% of qualified wages, including qualified health plan expenses, up to $10,000 in wages per employee per calendar quarter. The credit caps at $14,000 per employee annually.

The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended. For more information on determining qualified wages per the IRS website, please reference this FAQ.

Next, you will need to determine which employees’ wages would be disqualified for the ERC. This is primarily determined by ownership in the company and those related to the owners of the company.

Wages paid to related individuals, as defined by section 51(i)(1) of the Internal Revenue Code (the “Code”), are not taken into account for purposes of the Employee Retention Credit. A related individual is any employee who has of any of the following relationships to the employee’s employer who is an individual:

  • A child or a descendant of a child;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mother, or an ancestor of either;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

In addition, if the Eligible Employer is a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation.

If the Eligible Employer is an entity other than a corporation, then a related individual is any person that bears a relationship described above with an individual owning, directly or indirectly, more than 50 percent of the capital and profits interests in the entity.

If the Eligible Employer is an estate or trust, then a related individual includes a grantor, beneficiary, or fiduciary of the estate or trust, or any person that bears a relationship described above with an individual who is a grantor, beneficiary, or fiduciary of the estate or trust.

 

The following table is a general description of how the family attribution rules are applied to controlled groups.

The ownership interests of:

Are attributed to:

 Additional Information:

Spouse

Spouse

EXCEPTION:
No attribution between spouses if there is no:
• direct ownership,
• participation in company, and
• no more than 50% of business gross income is passive investments. See
1.414(c)-4(b)(5)(ii).

Minor child (under age 21)

Parent

N/A

Parent

Minor child (under age 21)

N/A

Parent

Adult child (age 21 or older)

ONLY IF: Adult child
owns greater than 50%
of that business.

Adult child

Parent

ONLY IF: Parent owns
greater than 50% of
that business.

Grandparent

Minor or Adult child

ONLY IF: Minor/Adult
child owns greater than
50% of that business.

Minor or Adult child

Grandparent

ONLY IF: Grandparent
owns greater than 50%
of that business.

Sibling

None

None

 

Using the PPP & ERC Together

Those who received forgiveness of PPP loans were initially unable to qualify for the ERC. With the Taxpayer Certainty and Disaster Tax Relief Act, passed on 12/27/2020, it gives us an opportunity to claim both the ERC and PPP loan forgiveness, provided you don’t overlap on qualifying wages. This means you may use certain wages to qualify for PPP loan forgiveness, and then you must use different qualifying wages in order to claim the ERC.

For example, if you qualify under the reduced gross receipts and you determine you have a total of $200k of qualifying wages, and only received $100k in PPP funds that were forgiven (during the same qualifying time period), you would be able to use $100k of the qualify wages towards the ERC because only $100k were used for PPP forgiveness.

When calculating the amount of the credit, the ERC is calculated on a calendar quarter basis and is equal to 50% of qualified wages for 2020 and up to 70% of qualified wages for 2021.

 

Employee Retention Credit Calculator

We know that combining math and tax laws isn’t always fun, so we have compiled a calculator to help simplify your life a little. To figure out exactly how much you can claim, use the calculator!

 

  1. Go to the Calculator.
  2. Click File > Make a Copy at the top right hand of your screen. Now you have your own version of the calculator.
  3. Click on the tab at the bottom that is labeled 2020.
  4. First, you want to determine the eligibility of your business for ERC within that quarter. The calculator can help with this, and this post walks you through precisely how to do it. 
  5. Only change values in the light grey cells; do not change any of the values in the cells that are white, because those cells contain formulas, and altering the formulas will cause your calculations to result in errors. The content that appears in the light grey cells is simply example content, feel free to alter it to values relevant to your business.
  6. Once eligibility is determined, scroll down to the ERC Credit Calculation section and start entering qualified wages and health plan expenses. Here are a few things you should know:

 

 

For 2020, Q2 qualified wages and expenses include those paid out between March 13, 2020 and June 30, 2020

Q3 qualified wages and expenses include those paid out between July 1, 2020 and September 30, 2020

Q4 qualified wages and expenses include those paid out between October 1, 2020 and December 31, 2020

 

 

The following are restrictions on wages that qualify for ERC: 

  1. a) You cannot include wages paid with PPP or EIDL as qualified wages
  2. b) You cannot include wages paid out to employees who are related to the business owner as qualified wages
  3. c) You cannot include wages that have already been claimed for Work opportunity tax credit or any other tax credit as qualified ERC wages
  4. Add your inputs to the grey cells, and let the calculator do the work!

 

Key Takeaways

Many small-business owners, like you, operate out of an S corporation. And as you know, the tax law sometimes isn’t kind to S corporation owners, because the law limits or eliminates tax breaks other business owners can take.

Luckily for you, S corporation owners get to benefit from most of the big COVID-19 tax benefits, including the Employee retention credit and Payroll tax deferral

If you wish to use any of these strategies in combination with the PPP, there are many exceptions to work around. As this information is always changing, do not use the information above as direct advice. Please consult with an expert before making any final decisions.

With these updates with the ERC, year end tax planning is extremely important. Determining your wage for 2021 may help you qualify for more credit if done correctly. If you need help with any of the COVID-19 tax laws or tax planning, please call us at 281-440-6279.

 

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