ERC Part IV: Claiming the Credits
We hope you have tuned into the prior 3 “episodes” in this mini-series. If you haven’t, we would highly recommend starting from the beginning! If you are a loyal follower, welcome back. Today we are getting into the nitty gritty – how to actually get the money! Some common questions as we dive in:
Q 1: This is a tax credit – we are tax exempt – so aren’t we ineligible?
A1: While this is a tax credit, it is a payroll tax credit, and nonprofit pay payroll taxes just like every other employer. Also, the payroll tax is mostly a means to an end – a way to get money from the government into your organization. See Q2 for more….
Q2: Is my credit limited to the amount of payroll taxes I paid in during the period? In most quarters that amount is significantly less than the total credit.
A2: Great question! You are not limited to the amount paid in, but you do need to know that amount and you will report the credit in two categories on the 941X – Nonrefundable and refundable. See below for more details.
Q3: My organization is eligible, we have calculated our credit, and we are ready to file. So…. how do we get the money?
A3: At this point (early October, 2021), for the majority of credits (from March 13, 2020 – Q3 2021) you most likely have one option- via a 941-X or an amended payroll tax return. Technically you could still claim Q3 2021 on your timely filed 941 (do it if you can- the cash flows much faster!) but if you use an outsourced payroll processor, many require that data to be on on or shortly after 9/30, so you may have missed your window.
BASICS OF THE 941-X
- Today, this is a paper-filed payroll tax amendment. To file it, you have to print, sign, and mail (we recommend Certified mail!) the form to the IRS. As you can imagine, the IRS has accumulated quite a backlog and processing times are long. We don’t really have any way to know, but have heard rumors of 9+ months before that magical day when you get your check in the mail.
- In order to prepare the 941-X, you need to have the following handy:
- Original 941 for the relevant quarter(s)
- Calculation of eligible wages and healthcare [separate totals] to be used for the credits (see the next episode for more details on this)
- In most circumstances you will use the following lines on the form (note- if you already claimed some ERC, FFCRA, or some other anomalies, you will have greater complexity than what is below):
- Part 1: Check box 2 [Claim]- you are reporting an overreported amount and asking for a refund or abatement.
- Part 2: Check boxes 3 [certification of filing form W-2] and 5d [claim is for federal income tax, social security tax, Medicare tax, or additional Medicare Tax that I didn’t withhold from employee wages]
- Part 3: Again- on the most basic 941-X for ERC you will fill out the following:
- Line 18a: Nonrefundable portion of ERC – For wages paid prior to July 1, 2021, calculate this amount based on box 5a from the 941 * 6.2%. this represents the employer portion of social security taxes paid in the quarter. In the far right column this amount should be listed as a negative as the “tax correction” is that the IRS owes you this money. For wages paid after June 30, 2021, this amount is instead based on the employer portion of Medicare taxes. [yes- they changed the form in July. We all have feelings about this:)]
- Line 23: Enter the subtotal from line 18z and any other tax corrections.
- Line 26a: Refundable portion of ERC – This is your total calculated credit less the non-refundable amount listed on line 18. This too should be a negative amount in the tax correction column.
- Line 27: Add line 23 + line 26a – this represents the total credit due to the organization (shown as a negative).
- Line 30: Qualified wages for the ERC – this is all wages eligible for the credit in the eligible periods. This total should NOT include wages over the max ($10k/year in 2020, $10k/quarter in 2021), nor should it include wages you have backed out of your calculation as they were covered by PPP or a restricted grant.
- Line 31a: Qualified health plan expenses for the ERC – similar to the above, this is the eligible healthcare costs (employee and employer portion of medical, dental, and vision costs). Same rules as wages- only to max eligible; excluding costs paid for by other sources.
- Line 37: This is the narrative box where you explain how/why you are claiming the credit. We typically recommend stating why/how the organization is eligible (eg: eligible drop in gross receipts or via government shut-down), and summarizing the totals stated on lines 18a, 26a, 27, 30, and 31a and stating the resulting credit.
Helpful hint – if you add line 30 + 31a and multiply by the credit % (50% in 2020; 70% in 2021) that must equal your amount on line 27.
How to file? As mentioned above, this is a paper filing. Your organization can prepare it yourself, you can have your payroll processor prepare and file it (ask what the wait time is, many are very backed up), or your accountant or advisor can prepare it and help with the underlying analysis to get to the totals on the form.
Clear as mud? Maybe. While the form itself isn’t ALL that complicated (as far as tax forms go!), the underlying calculations and support you keep in your files for eligibility, wage and benefits backup, analysis to prove no double dipping, and other work it takes to get to the step of filing the 941-X is really the heavy lifting.
One important note – the IRS form 941-X changed in July 2021 in an effort to better capture the American Rescue Plan Act (ARPA) changes. These changes included extension of and changes to the COVID-19 related credit for qualified sick and family leave wages, slight modifications to the mechanics of the ERC, and the new credit for COBRA premium assistance payments.
We started drafting this blog with “we will keep this brief” but clearly it didn’t end up that way. We hope you found it helpful and will tune in next time for an episode on maximizing ERC and PPP in overlapping periods. Or as my favorite credit card commercial lady would say, “More money, more money!!!”
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