Frequently Asked Questions
The Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act) was signed into law on March 27, 2020. It included two programs to assist businesses with keeping workers employed: the Payroll Protection Program (PPP) administered by the Small Business Adminstration and Employee Retention Tax Credit (ERTC) administered by the Internal Revenue Service.
PPP funds are distributed based on 2.5 months of payroll and a minimum of 60% of the funds must be used on payroll to be eligible for forgiveness. Additionally, PPP funds are not taxable as revenue and you may still take deductions for the payroll covered by PPP.
ERTC tax credits, however, are credits (or refunds) for a percentage of payroll in each quarter that you qualify. There are specific rules for determining eligibility by quarter, and limiting the dollars that can be claimed for each employee. While this is a tax credit, business owners see these credits in the form of a physical check mailed to you - usually for many multiples of the payroll taxes you paid.
This is called a "Fully Refundable" credit, meaning you get it paid back to you even if it is more than the tax the credit is being applied against.
Initially with the CARES Act, employers could choose to apply for PPP or claim ERTC credits, but not both.
PPP was more beneficial than ERTC for most businesses (for reasons we won't go into here) and so most businesses with under 500 employees received forgivable PPP Loans.
On March 11, 2021, The American Rescue Plan Act of 2021 was signed into law and included many modifications and expansions to existing elements of previous stimulus programs.
Noteworthy modifications for business owners included:
So the short answer is “Yes” . . . you can claim ERTC even if you received PPP funds.
Unlike the Payroll Protection Program (administered by the Small Business Administration), there is actually no “application process” for the Employee Retention Tax Credits.
You simply claim the ERTC tax credit like you would any other tax credit - by asserting to the IRS that you can legally claim the credit.
When you claim a child tax credit, you do so by asserting this fact on your Form 1020 Personal Income Tax Return.
The difference is that when you claim an ERTC tax credit, you do so on your Form 941 Employer Quarterly Tax Filing.
To claim the credits, you must file an amended form (the Form 941-X) which will trigger an "overpayment" notice from the IRS and they'll cut you a refund check for the credits you claim.
Even though you may feel like revenue is back to normal, there are some items you want to consider before passing on this ERTC assessment.
First, even if revenues have returned to “normal” in 2021, you may have qualified in 2020 and you can retroactively claim those credits. That eligibility criteria in 2020 was based on revenue declines from 2019, or if your business was partially or fully closed due to governmental mandate.
Second, while your revenue may have returned to “normal” in Q1 2021, remember that we are comparing your Q1 2021 to Q1 2019. If 2019 was a year of growth for your business, then your revenue levels 2 years ago may have been much less than Q1 2020.
And lastly, if your revenues were down in Q4 2020 by just 20% compared to Q4 2019, then you are automatically eligible for Q1 2021. There is a safe harbor provision that few advisors are talking about, and it means that many businesses are qualifying for $7,000 per employee in Q1 2021.
I know, it seems too good to be true, but the government wants to incentivize and reward you for keeping US residents employed and money flowing through our economy as we rebuild bigger and stronger than before.
You are most likely referring to a provision of the CARES Act that allowed employers to defer the deposit and payment of the employer's share of Social Security taxes. Those deferrals must then be repaid - with at least 50% of the balance due by 12/31/21 and the remaining balance due by 12/31/22.
ERTC credits are NOT a deferral. They are dollar-for-dollar credits against wages you’ve paid. Not taxes you've paid, but actual wages.
These credits will come in the form of a refund check directly to you (unless you owe back taxes in which case the IRS will first apply the credits to those back taxes and cut you a check for the difference).
And you will NOT have to re-pay these funds (unless, of course, you don’t provide adequate documentation in the course of an audit).
Your banker was probably very helpful when it came to getting your PPP funds because they were effectively signing you to an SBA-guaranteed loan. The SBA paid the bank administrative fees based on the PPP loans they made, and so they were incentivized to educate you about the program and get all your paperwork in order.
Compared to the ERTC, the PPP program was also a rather simple calculation. 2 ½ times your average monthly payroll including health insurance and state unemployment taxes.
From the conversations we’ve had with bankers, they have no interest in involving themselves in your employment tax compliance. For them it is a liability and beyond their scope of services.
(Edit for 2023: Bankers are now on top of this. ERTC isn't the mystery that it once was so bankers are making backroom deals with large ERC "specialists" to sell their list of clients. Buyer beware of these firms, even if they are recommended by your banker. The Financial Meltdown of 2008 and the continued fraud at Wells Fargo has shown us just how much we can trust the bankers when their pocketbooks are padded. Download our new report and make sure you're looking out for yourself. No email opt-in required. This is a direct PDF download:
(Updated in February 2023: If you previously visited this webpage and found a different answer here, our opinion on this has changed drastically since having almost two years of experience behind us now - in seeing what clients are getting back from the Payroll Services who have chosen to jump into this ERTC specialty.)
Your Payroll Service does an excellent job of executing the fundamentals of paying your employees, paying your employment taxes and filing your quarterly reports.
However, we have yet to find a Payroll Service that allocates PPP and ERTC as precisely as we do . . . by employee, by day, by hour.
This is especially troubling considering how these companies are positioned as experts in all things payroll . . . and yet they were not built for this level of data analysis. We have consistently seen these services (and I'm even talking about the big ones like AD*, Payche*, He*rtland) under-claiming these credits and charging a hefty fee all the same. But an even bigger deal . . .
Most Payroll Services are asking clients to sign an indemnification waiver before submitting a Form 941-X because the Payroll Service can take no responsibility for the accuracy of the ERTC credits you are claiming. And even more troubling, they are allowing you to claim ERTC by checking a box and attesting that you had a full or partial suspension of opertations.
This is NOT okay!
I invite you to read our Special Report and pay particular attention to our discussion on developing contemporaneous documentation to support your tax position in the event of an IRS audit. That's a mouthful, I know, but the IRS will have a field day auditing all of these clients who filed their Form 941-X through their payroll company. All they have to ask is "How did you qualify?", and they'll be recovering ill-gotten refunds and penalties and interest by the BILLIONS!
But not to only highlight the negative, there are certainly exceptions to that rule . . .
And there have been plenty of Payroll Services that we’ve worked with who are happy to provide the payroll registers that we need to perform the allocations. And they are happy to file the Amended Form 941-X when they act as a PEO (Professional Employer Organization) and file all their clients' payroll taxes on a single Schedule R
Whether your tax accountant is a CPA or EA, he or she most likely only prepares your Federal and State Income Tax Returns. However, ERTC credits are claimed against Payroll Taxes on Form 941-X.
The complexity of the ERTC program is a beast unto itself and every tax accountant we’ve talked to has said they focus on staying up-to-date on the ever-evolving income tax code, and they can’t now become experts in the ERTC program as well.
If your tax accountant is comfortable determining your eligibility by quarter and year, computing your credits, and preparing contemporaneous documentation to support an IRS audit, then you should certainly let them handle all of this.
If you want to preserve that relationship and let us handle this special situation, we're happy to engage.
Your Bookkeeper should certainly have access to all the information that is needed for an accurate calculation of your legal ERTC claim. They will have your financial reports, payroll registers, and PPP loan forgiveness documents.
The Million Dollar Question is . . . Do They Have The Time?
So far, we have not found a bookkeeper who is able to take all this on, while handling the day-to-day of bookkeeping.
Questions That Should Be Asked
But they aren't because . . . how would you know to ask?
While technically "true", this should come with a HUGE warning label.
There are a ton of ERTC companies (some are just marketing outfits) telling business owners they will qualify if they have any supply chain issues. Frankly, they are telling people that they qualify for almost anything pandemic related.
I've even had a prospect tell us they were qualified by another firm because they had trouble hiring people due to all the unemployment checks.
Bottom Line: the partial suspension of operations (even due to supply chain constraints) must be as the result of a government mandate. There are plenty of businesses where a case can be made, but that is exactly what needs to occur . . . a case must be made.
This is where we lean on tax attorneys to assess all the federal, state and local mandates to determine how those mandates results in a "more than nominal" impact which resulted in a partial suspension of operations.
Even if you did not have supply chain issues, you may still qualify based on the reduction of revenue.
And we are definitely not saying that "Supply Chain" cannot be a valid reason. All I'm saying is that you had better be prepared with contemporaneous documentation to support that determination because this will be a point of emphasis when the IRS audits these refunds.
Not to brag, but we pioneered this industry. When others were figuring out how the credits were calculated at their most basic level . . . we were already writing the algorithms to optimize these credits by employee . . . by day.
If you received PPP funds, the precision with which we allocate these funds is critical to ensure there is no "double-dipping" while also maximizing every dollar that is legally owed to you.
Here's an example of why this matters:
Since we allocated wages by employee by day, we may use PPP funds to pay an employee in the morning, and use their afternoon pay as qualifying wages for ERTC. This means that for many clients, we allocate 100% of their PPP funds without having to reduce the maximum allowable credits for each employee (that's up to $5,000 per employee in 2020 or $7,000 per employee per quarter in 2021).
So if you want to know whether the ERTC firm pitching you is truly maximizing your refund, that is the question you need to press them on.
If they are asking for a quarterly summary of payroll . . . then there is no way they can allocate this precisely by day by employee.
Unless they are getting a payroll report showing every employee and the breakout of every paycheck, then you're not working with an "expert".
Short answer: Affiliate partners.
Long Answer: From the beginning, our focus has been on (1) designing a client experience that is a joy for our clients and (2) designing an ERTC calculation/methodology that would legally maximize tax refunds.
It seems that everyone's else first priority was building marketing assets and signing on new clients . . . without a clue of how to serve them.
But that's okay.
Luckily for their clients, they found us and their clients are getting the same quality of service that we offer our own clients.
We've given permission for other "ERTC Experts" to utilize our FAQ's and/or online credit calculator as long as we are the ones doing the work on the backend. I don't want my educational material to lead unsuspecting clients to another firm that isn't executing with the precision that we do.
So check out some of our General FAQ's. Do a Google search for them. You'll find them verbatim on over 1,000 websites.
And then come back here to get started and know you're getting the best fee structure by coming to the source.
We most certainly have our own tax attorneys to assist us, but this question comes up when a client wants to qualify based on a partial suspension of operations and they cannot provide us a clear understanding of which government mandates restricted their operations.
While some ERTC firms boast of having attorneys on staff to write memos for their clients, we are fundamentally opposed to that concept.
Instead, we recommend that you engage an attorney independently. We are happy to refer you to attorneys that we know who will do a fine job.
However, we believe there should be a clear separation between the attorney's opinion letter and our firm who is calculating your credits.
Since our fees are based on a percentage of the refunds that you receive . . . and since the size of those refunds are based on the time period that you qualify . . . we do not want there to be even an appearance of a conflict of interest.
If the IRS comes to audit, we want your truth to be that you engaged an independent, third party law firm to assess your eligibility and provide an opinion letter . . . and you brought that letter to us, an independent CPA firm.
What more could the IRS expect of you as a taxpayer? With that level of diligence, we can all sleep easy at night.
And to be clear, we do not require (or even recommend) these letters for every client. Less than 2% of our clients have needed these letters and this is really just a function of us being very conservative in our own judgment.
When other firms talk about being "aggressive" with these refunds, that's a position we just won't tolerate.
There's no need for that. Just apply the facts to your situation, execute the math precisely, and sleep easy knowing everything is above board.
It was true when we started and as far as we know, we're still the only ones. (Although I'm happy to be proven wrong.)
Every other CPA firm offers other services like income taxes, audits, reviews, bookkeeping, and payroll. We've been lucky to form incredible partnerships with many CPA firms who send us their clients - not even wanting a referral fee. They just want to know their client is being taken care of by the best.
Other non-CPA firms are offering ERTC services but they have historically only worked with other tax credits like the R&D credits.
No offense to the non-CPA firms, but they don't answer to anyone. They don't answer to a state accounting board with ethics rules. And it is apparent in many of their marketing messages, automated text messages and pushy sales calls wanting a signed engagement letter before you've even talked to anyone.
ERTC was meant to help impacted taxpayers, but the manual amendment process (you read that right, no e-filing) has led to a huge backlog of files at the IRS. For taxpayers in need of funds faster than the 8 to 12 months we expect, we have undergone due diligence with an ERTC Investment Fund that is advancing cash in 2 to 4 weeks.
This was a monumental milestone for us because it was institutional acknowledgment that our methodology was sound - our calculations precise - our calculations legally maximized. Because after all, institutions don't want to lend money on a bogus receivable . . . they receive our workpapers as collateral.
In the interest of full disclosure, we introduce you to the Fund after we have completed your calculation and presented your Form 941-X's. But beyond that introduction, there is no financial relationship between us and Fund. We want to keep this at arm's length - we have no desire to wade into the regulations and protections of the consumer financing industry.