Employee Retention Credit: Claims, Advance Payments and Documentation

The Employee Retention Credit (ERC) under the CARES Act encourages businesses to keep employees on their payroll. In 2021, the tax credit is 70% of up to $10,000 in wages paid in the first and second quarter by an eligible employer whose business has been financially impacted by COVID-19.

In our article dated January 11, we discussed the changes to the ERC as it relates to who can claim the benefit, as well as the extension through July 1, 2021. But how a company claims the ERC and how they receive advance payments adds yet another layer.

Claiming the Credit

The ERC is claimed on a company’s payroll tax form that they file with the IRS. It’s reported as a credit that is taken against the payroll taxes on the payroll tax returns. The payroll tax form used largely depends on the type of business:

• Form 941 – quarterly filing
• Form 943 – agriculture employees
• Form 944 – annual filing
• Form CT-1 – railroad retirement

If a company has enough information to confirm that they qualify for the ERC in the current quarter, they can begin reducing their required payroll tax deposits of social security, Medicare and federal withholdings.

Claiming Advance Payment

If the company determines that their expected credit exceeds the reduced payroll tax payments, they may file Form 7200 to request an advance payment of employer credits due to COVID-19.

Form 7200 was available in 2020 and was recently updated for 2021. Some of the guidelines around this form include:

• Companies such as new businesses or employers with more than 500 employees are not eligible.
• The amount of the advance may not exceed 70% of the average quarterly wages paid in the calendar year 2019.
• The form may be filed during the current quarter for the qualified wages in the quarter.
• The form may not be filed for the quarter after the company files their Form 941.
• The last day to file to request an advanced payment for the second quarter of 2021 is August 2, 2021.
• The form is required to be faxed to the IRS to expedite the processing: 855-248-0552.

Once the credit is claimed on the payroll tax forms, the company should reconcile the advanced payments that were received and the federal tax deposits that were made to the IRS. If the return results in an overpayment, the overpayment can then be refunded or carried forward to the next quarter.

Documentation

The IRS recommends keeping all records of employment taxes for at least 4 years after the date the tax becomes due or is paid, whichever is later. The IRS notes the following information be included in your recordkeeping.

• Documentation to show how you figured the amount of the employee retention credit.
• Documentation to show how you figured the amount of qualified health plan expenses included in the credits.
• Documentation to show your eligibility for the employee retention credit based on the suspension of business operations or a decline in gross receipts. See IRS.gov/ERC for more information.
• Amount of all advances received and copies of completed Form(s) 7200 you filed with the IRS.
• If you use more than one third-party payer or also file your own return for some wages, documentation to show which wages related to the credits were paid by which third-party payer or you.

The IRS has created an FAQs page to help address additional questions related to the ERC.

Your BMF Advisor is available to help you determine the applicability of your unique situation. Contact us if you have questions on claiming the credit, advance payment or how your tax status could be affected.