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Although the pandemic is well behind us, many small-to-midsize-business (SMB) owners are still feeling the financial impacts they faced during this turbulent period. From mass layoffs to mandatory closures and supply chain issues, the pandemic put a stronghold on nearly every facet of business in America.
The effects of COVID-19 on our economy can’t be understated:
This period was accompanied by historic drops in output in almost all major economies, and the gross domestic product for the United States fell by 8.9 percent in the second quarter of 2020, the most significant single-quarter contraction in more than 70 years.
So, how did SMB owners fare specifically?
- A survey reveals that 43% of small businesses had to close their doors at least temporarily.
- The median firm with monthly expenses over $10,000 had only enough cash on hand to last roughly two weeks.
- A study found that year-over-year small business revenue dropped 52% while payroll expenses decreased by 54% in the second quarter of 2020.
The CARES Act and the Employee Retention Credit
In response to the economic fallout, Congress passed the Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, a $2.2. trillion economic stimulus bill. Included in the CARES package were a few key programs, including the Paycheck Protection Program (PPP), which provided forgivable loans to small businesses.
The CARES Act also established a crucial federal tax credit for SMB owners to take advantage of. This Employee Retention Credit, also known as ERC, was initially established for employers whose operations were suspended due to COVID-19 or whose revenue had significantly decreased due to COVID-19. It’s a payroll tax refund from the United States Treasury Department that’s applicable to businesses that kept employees on payroll in 2020 and 2021.
Originally meant to help employers who were not eligible for a PPP loan, this tax credit was amended so employers who received the PPP could also potentially claim the ERC. While the program technically ended on December 31, 2021, eligible employers may still be able to claim the tax credit by filing amended forms with the Internal Revenue Service (IRS).
All this is excellent news for SMB owners like yourself because we’ve helped thousands of businesses recover significant refunds to use as they please – for paying off debt, growing their business, operating expenses, and more.
Keep reading, as we’ll show you how to take the first steps in filing for the Employee Retention Credit, as well as the ERC forms needed to claim your tax refund.
Determine when your business qualified for ERC tax credits
For 2020 qualification, the whole calendar year is considered, while 2021 is determined quarter by quarter.
- How to qualify for 2020 ERC tax credits: Per the IRS, “For 2020, the Employee Retention Credit (ERC) is a tax credit against certain payroll taxes, including an employer’s share of social security taxes for wages paid between March 12, 2020, and December 31, 2020. The tax credit is 50% of the wages paid up to $10,000 per employee, capped at $5,000 per employee.”
- How to qualify for 2021 ERC tax credits: Per the IRS, “In addition to claiming tax credits for 2020, small businesses should consider their eligibility for the 2021 ERC. The ERC is now available for all four quarters of 2021, up to $7,000 per quarter. The level of qualifying business disruption has been reduced so that a 20% decline in gross receipts during a single quarter will make a business eligible for a maximum yearly benefit of $28,000 per employee.”
How do I report qualified paid wages in the first quarter of 2020?
According to the IRS, “An Eligible Employer that pays qualified wages in the first quarter of 2020 should report these wages on Form 941, Employer’s Quarterly Federal Tax Return, for the second quarter of 2020.”
ERC form types explained
There are a lot of ERC-related forms you might encounter during the Employee Retention Credit filing process, depending on the size of your business and the quarters you may be eligible. Let’s break down what these forms are, what they’re used for, and how they could move you closer to receiving a qualified tax refund.
Form 941:
What is it?
Form 941 is distributed by the IRS as your “Employer’s Quarterly Federal Tax Return.”
What step in the ERC process will you encounter this?
This will be the first form you need to locate as you prepare to file for ERC tax credits. Assuming you have employees (and you kept them on payroll during the pandemic), you have already filled out this form for the years 2020 and 2021. One of the first items of business when working with an ERC company like Innovation Refunds will be to find your 941, so you can amend it.
When is the form used?
Per the IRS: Employers use Form 941 to:
- Report income taxes, Social Security tax, or Medicare tax withheld from employees’ paychecks.
- Pay the employer’s portion of Social Security or Medicare tax.
Form 941-X:
What is it?
Form 941-X is your “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.”
What step in the ERC process will you encounter this?
This is the main form you’ll need to amend your previously filed tax returns and claim your ERC tax credit refund. To submit the form, you’ll need to note that you are making corrections to your Form 941 – and you will need to provide a detailed explanation of all the corrections you’re making via Form 941-X.
Corrections to amounts reported on Form 941, lines 11c, 13d, 21, and 22, for the Employee Retention Credit, are reported on Form 941-X, lines 18a, 26a, 30, and 31a, respectively.
When is the form used?
Per the IRS, “Use Form 941-X to correct errors on Form 941 that you previously filed.” If you find an error on a previously filed Form 941, you must correct this error using Form 941-X. In addition, Form 941 is used to file for certain tax credits an organization may be entitled to.”
Form 943:
What is it?
Form 943 is the Employer’s Annual Federal Tax Return for Agricultural Employees.
What step in the ERC process will you encounter this?
You will only use Form 943 if you are a specific type of agricultural operation. Many farms are considered a “pass-through entity,” which means the business itself does not pay income taxes. However, the tax is passed through to the owner(s).
When is the form used?
Per the IRS: “File this form if you paid wages to one or more farmworkers, and the wages were subject to Social Security and Medicare taxes or federal income tax withholding.”
Form 943-X:
What is it?
Form 943-X is the Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund.
What step in the ERC process will you encounter this?
Per the above, you will only encounter this if you need to amend your Form 943 for an agricultural business.
When is the form used?
The IRS says to “use this form to correct errors on a previously filed Form 943.”
Form 944:
What is it?
Form 944 is the Employer’s Annual Federal Tax Return.
What step in the ERC process will you encounter this?
Much like Form 941, this will be the first form you need to locate as you prepare to file for the ERC tax credit. Assuming you have employees (and you kept them on during the pandemic), you have already filled out this form for the years 2020 and 2021.
When is the form used?
According to the IRS, “Form 944 is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter.”
Form 944-X:
What is it?
Form 944-X is the Adjusted Employer’s Annual Federal Tax Return or Claim For Refund.
What step in the ERC process will you encounter this?
If you previously filed a Form 944, this is the main form you’ll need to amend your returns and claim your ERC payroll refund. To submit the form, you’ll need to note that you are making corrections to your 941 – and you will need to provide a detailed explanation of all the corrections you’re making via Form 941-X.
When is the form used?
Per the IRS: “Use this form to correct errors on Form 944 that you previously filed.”
Form 2848:
What is it?
Form 2848 is the Power of Attorney and Declaration of Representative.
What step in the ERC process will you encounter this?
This is a game-changer strategy that allows tax attorneys to speak on a person’s behalf. This means that the actual work on a claim is done by a tax attorney who helps navigate all the difficulties, and prepare documents. Essentially, it takes the confusion out of the equation by making the upfront process significantly easier.
When is the form used?
The IRS says, “Use Form 2848 to authorize an individual to represent you before the IRS. The individual you authorize must be a person eligible to practice before the IRS. Your authorization of a qualifying representative will also allow that individual to receive and inspect your confidential tax information.”
Form 8821:
What is it?
Form 8821 is used for Tax Information Authorization.
What step in the ERC process will you encounter this?
Along with finding your Form 941, this is one of the first documents you will encounter. Form 8821 simply authorizes the IRS to disclose your confidential tax information to the person (or firm) you appoint.
It does not grant the authority to act on your behalf but simply to receive information during the designated period. If you choose to work with Innovation Refunds (or another qualified ERC company), Form 8821 will let our team of independent tax attorneys receive verbal or written account information (transcripts) and copies of IRS notices.
When is the form used?
Per the IRS: “File Form 8821 to:
- Authorize any individual, corporation, firm, organization, or partnership you designate to inspect and/or receive your confidential information verbally or in writing for the type of tax and the years or periods listed on the form.
- Delete or revoke prior tax information authorizations.”
Form 3508:
What is it?
Form 3508 is the PPP Loan Forgiveness Application and Instructions.
What step in the ERC process will you encounter this?
It depends on whether you filed for a PPP loan – and whether you used money from that loan to pay employee wages. To apply for forgiveness of your First or Second Draw Paycheck Protection Program loan, you (the Borrower) may use the Form 3508EZ or the Form 3508S application to submit to your lender.
When is the form used?
The requirements are simple for using this form: If the amount of your first or second draw PPP loan was $150,000 or less, you may use it.
Form 8822-B:
What is it?
Form 8822-B is for the Change of Address or Responsible Party.
What step in the ERC process will you encounter this?
Did the pandemic displace your business, or cause any other disruptions to your physical locations? If you have kept the address of your business the same since 2020, you will likely not need to use this form.
When is the form used?
Per the IRS: "Form 8822-B is for businesses and other entities with an Employer Identification Number application on file. Use Form 8822-B to notify the Internal Revenue Service if you changed:
- Business mailing address
- Business location
- Identity of your responsible party"
When to use Form 944 vs. 941:
All these forms can make applying for the Employee Retention Credit confusing. One of the most common questions we get is when to use Form 944 vs. Form 941. Luckily, the IRS has already established guidance on this matter.
“If you're currently required to file Form 944, Employer's Annual Federal Tax Return, but estimate your tax liability to be more than $1,000, you may be eligible to update your filing requirement to Form 941, Employer's Quarterly Federal Tax Return. If you're an employer required to file a Form 941 but estimate your tax liability will be $1,000 or less for the tax year, you may be eligible to switch to Form 944. To request a change, send a written request, postmarked by March 15, or call the IRS at 800-829-0115 by April 1. The agency will send a written notice if it changes your filing requirement.”
What else? The IRS will give you notice if it is required to file form 944. Otherwise, form 941 is required to file. Form 944 declares the amount of income tax withholding and FICA tax you’ll be paying as an employer.
Employers are required to file form 941 quarterly versus 944, which is filed yearly.
The difference between Form 941 vs. 941-X
We’ve outlined much of this above, but it bears repeating: your Form 941 needs to be filed regularly to report federal withholdings from employees. Your Form 941-X is the one that you fill out when you need to amend Form 941. It’s normally used to correct errors but can also be used to retroactively apply for ERC tax credits.
Form 941 is “Employer’s Quarterly Federal Tax Return.” This form is used by employers to report income taxes, Social Security tax, or Medicare tax withheld from employees’ paychecks. Generally, you must file Form 941 to report wages you’ve paid and tips your employees have reported to you.
Form 941-X is “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.” This form is used to correct employment taxes that you’ve already filed – including 2020 and 2021. If you find an error on a previously filed Form 941, you must correct this error using Form 941-X.
Quick tip: When filing, ensure Form 941 for 2020 and 2021 was filed and processed by the IRS before you file Form 941-X.
How to calculate your Employee Retention Credit refund for each qualifying quarter
The amount your business is eligible for depends on the accuracy of your payroll records, involvement in other government relief programs, healthcare statements, owing back taxes, any deductions you may have previously taken, and other factors. Working with a team of tax professionals through a qualified ERC company like Innovation Refunds will make this entire process feel a lot simpler, as well as less time-consuming.
2020 ERC: A credit of 50% of the wages paid – up to $10,000 per employee from March 12 – December 31, 2020. To qualify for the ERC in 2020, your business must have less than or equal to 100 full-time employees.
2021 ERC: A quarterly tax credit of 70% of the first $10,000 in wages per employee in each quarter of 2021 from January to September 2021 (up to $7,000 per employee per quarter or 70% of $10,000). To qualify for the ERC in 2021, your business must have less than or equal to 500 full-time employees.
ERC and PPP overlap
One of the top questions we receive at Innovation Refunds is whether it’s possible to claim the ERC if you received a PPP loan. There is some overlap, and the short answer is yes, a business can potentially receive both the ERC and a PPP loan, but not for the same payroll expenses.
Under section 206 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, employers who are eligible for the ERC can claim it, even if they’ve received a Small Business Interruption Loan under the Paycheck Protection Program.
It’s important to note again that the PPP ended on December 31, 2021. And the ERC deadline is approaching fast, as well – the deadline for ERC claims for all quarters in 2020 is April 15, 2024. For all quarters in 2021, ERC claims must be filed by April 15, 2025.
So, what are the qualifications for you to receive the ERC?
- Had less than 100 employees in 2019 to qualify for the 2020 ERC and had less than 500 employees in 2019 to qualify for the 2021 ERC.
- Have been fully or partially closed during any part of 2020 and/or 2021 OR your gross receipts for any quarter of 2020 declined by 50% or more when compared to the same quarter of 2019. This is reduced to a decline of only 20% within any one quarter of the year in 2021.
- Have kept W-2 employees on the payroll.
Can I file both the PPP and ERC in the same tax year?
As we alluded to above – the short answer is no. Salaries that were claimed under the PPP forgiveness cannot be included in the ERC. However, if you used the PPP loan funds to cover other expenses, such as rent or utilities, you could potentially be eligible for the ERC for employee wages.
At Innovation Refunds, our team of independent tax attorneys have extensive knowledge of and experience in tax code interpretation. We’ll partner with you to ensure form information is accurately filled out and filed. Filing with an ERC company can help save time, allowing you to get back to business faster.
Determine your business’ eligibility today.
*Innovation Refunds works with a team of independent tax professionals. We will share your information with these professionals to evaluate and process your claims. Innovation Refunds does not provide tax or legal advice. Terms & conditions apply.
