The ERTC applies for wages paid from March 13 to Dec 31. Most everyone has filed their 2020 Q4 form 941 by now. In this case, you will need to file an amended Q4 form 941 (941-X), and apply the credit for all of 2020 to the Q4 report. The credit is calculated using form 7200, but form 7200 does not need to be included in the filing. The form 7200 needs to be faxed to a dedicated IRS fax line.
If you have been denied, or have not yet received PPP forgiveness, then apply the ERTC to Q4 form 941. If you have already received PPP forgiveness, then we need to wait for guidance from IRS before actually submitting the form 941-X. This is because they need to tell us how to allocate wage amounts to ERTC or PPP forgiveness.
If you are filing form 941-X, mark it for a refund. These will be manually processed, so a refund check could easily take months to receive.
You will want to reduce your payroll tax deposits by the approximate amount of your credit for each quarter. The credit applies first to offset the employer portion of SS, then becomes refundable beyond that. Refundable, meaning that you will receive a check for the full amount of credit.
Calculate the ERTC on form 7200, and fax it to the IRS. They have a dedicated group who has promised to process checks out within 2 weeks or so. You do not have to file form 7200 with the 941.
These calculations are quite complex, so here are a couple of examples of how this can impact you and your business:
Joe owns and operates a roofing business. He pays himself a salary of $50K/yr, and has 3 employees who earn $15/hr. At $15/hr, each of their annual wages is roughly $30K/yr.
Retroactive to 2020, each of the 4 earned over $10K for the year, so he would get a credit of $5K x 4, for a total of $20K on the form 941-X.
For 2021 Q1 and Q2, the credit changes to 70%, and the cap of $10K changes from annually to quarterly. For each quarter here is the calculation:
$50K/yr = $12.5K/qtr, so Joe’s wages max out at $10K, yielding a credit of $7K
$30K/yr = $7.5K/qtr in wages, so each employee’s wages yields a credit of $5,250 ($7.5K x 70%)
The credit for each quarter is $22,750 ($7,500 + (5,250 x 3))
We have the same company, and I talked to Joe about his company and we did some tax planning (can you say shameless self-promotion?). His wife and daughter run the office, and have not normally been on the payroll.
We put both of them on payroll at $40K/yr, or $10K/qtr. He gets a credit of $7K/qtr for each of these 2 additional employees, for a total of $14K.
Furthermore, he pays his 3 regular employees a quarterly bonus of $2,500 ($7,500 total) each in order to max out the $10K/qtr. This yields an additional credit of $5,250 (1,750 x 3).
So, let’s get this straight:
He paid out an additional $27,500 in wages.
He receives additional tax credit of $19,250 ($14K + $5,250)
Neglecting payroll tax (7.65% employer share) he paid out an additional $27,500 in wages, and received back a credit of $19,250, meaning that the additional wages he paid out actually costed him $8,250, or 30 cents on the dollar (38 cents on the dollar when considering the additional FICA) …..not to mention $20K of additional wages came into his household.