In this week's episode, Travis answers more of your questions about the ERC!
In this week's episode, Travis answers more of your questions about the ERC!
Hey, welcome everybody to the ERC FAQ weekly session. I'm your host, Travis Watkins. I'm a tax attorney. We do lots of these ERCs and I want to help you out with your questions as they relate to the ERC. And today we're going to be hitting one. Go ahead and leave any of these questions that you've got over here in the comments and we'll hit those things. But I wanted to take one that we're getting quite a bit right now just off the top, and that is it relates to what documents do I need to submit to an outfit like ours, a firm like ours that does ERC? Ultimately, what will you need in order to calculate your Employee Retention Credit and to also substantiate what those numbers will look like into the future? Because it is important to build a file here, but we've handled this question before in previous videos, but I'm going to approach it a little bit differently here today since it's coming up quite a bit.
We're going to go ahead and just run through the documents that are needed and then I'm going to tell you why they're needed and maybe that gives it a little more perspective. It helps to kind of know what the reasoning is behind all these requests, and maybe that'll also explain to you some things that would make your ERC run a little more efficiently. Certainly, would help us calculate these ERCs more efficiently so you don't have to go back and forth many times with your preparer and you can just round them all up at one time because some of them may be in the hands of third parties. But it also helps us to quote kind of a good ballpark of what you're going to be receiving as an ERC candidate if you can come up with these documents fairly quickly in the consultative process. So here's where we are:
This is what we ask for qualified clients, those that look like they're going to qualify for the ERC for certain quarters. Employee Retention Credit. First of all I asked for it to come up with the calculation itself. We need detailed payment reports by employee, by quarter, and those are the most efficient ones to send. Now, if you don't have quarterly some of these quarterly, you'll need to run your payroll software to get these, and you may have to customize your search in order to get this in a digestible form that will help calculate the ERC credit. But we're looking for detailed payment reports by employee by quarter monthly. If you don't have quarterly for quarters one through for of 2020 and quarters one through three of 2020, we have left off quarter 4, 2021, unless you were a startup business, that's not just a whole lot of candidates that we've seen anyway that came into fruition during the pandemic.
But nonetheless, if you are a new business during that time period, then you can also include Q4 of 2021 for this analysis. Right? The reports need to include wages paid to any employee, and really what we're looking for is full-time employees. Those are employees that work. I believe it's 130 hours a month or more, and you're going to want to have that report include reported cash tips. For instance, if it's a restaurant cash business, it needs to be any wages paid to any individual including those tips and reported cash regardless of whether or not that employee was terminated at some period along the way or whether they're terminated. Now for that matter, and some of these, I'll just, The reason I'm hitting this point is because a lot of these payroll reports, unless you really watch them, will exclude sometimes the employees that are no longer with the employer.
So make sure that you check the box whatever you need to do with your payroll reports or tell your accountant that you need all employees that were paid during those periods that I just mentioned. All right? Next, we, it's very important in that report that we include withholding a federal income tax both the employers and the employee shares. It helps to have those recounted in the reports. We're going to be able to include the employer's share of any of these taxes that are coming out. You want to be able to withhold, take out the withholding of federal income tax, but you, and you'll take out the employees portion of Social security and Medicare taxes leave in the employer's portion, okay? You get to take that as part of the calculation equation. Those things collectively Medicare and Social Security, those portions are known as FICA. So if it says FICA, take out the employees portion of FCA also needs to include health insurance and any other benefits paid by the employer, including things like 401k, health insurance, premiums are a big one.
If you offer health insurance, make sure that that gets into this report as well. Okay? Why do we need all this stuff? This stuff, as I mentioned, is what we need to calculate ERC funds that are due to the employer. We're going to take that number. Once we have established that type of a report, and received a report like that from the employer, then we can start breaking this down into what the actual ERC credit's going to be. So they're going to be different for 2020 than they are for 2021. In 2020 we're going to max out each individual employee at $10,000 paid over the course of however many quarters in 2020 that are eligible for the credit. We're going to subtract that out and cap them at $10,000 per employee. Once all that's done then we apply a and this is just for 2020, we're going to apply an equation to that.
We're just going to cut it essentially in half. Okay? So $5,000 per employee per year is essentially the max cap for 2020, different calculation for 2021. That's a little more lenient for employee earns. What you're looking at there is employees do get capped out at $10,000, but it's by quarter, it's not by year. So however many quarters you really start fresh for multiple quarters that are eligible in 2021, you can take 10,000 and 10,000 and 10,000 for q1 two and three for each employee. However, once we start applying the equation to that, it's going to be 0.7. It's going to be 70% of that aggregated amount of eligible payroll. That's what the ERC's going to look like. So having these by employee really helps, and by quarter so that we can see what the calculation's going to look like and to be able to cap each one of those employees on a running basis there sometimes over the course of different quarters. Okay? That's why we do it.
We also do it to see we're going to exclude any owners of the business and the owner's family. So if we see any of those things hopefully you can notate that in your reports that you send us. But even with best guess, if they've got the same last name, that kind of tips us off there. We're going to need to exclude those folks. It would be nice to take that out at that level as well. I've said this in previous videos, it depends a lot on what type of payroll company, what type of software you may be using for these, they are named different things, so there's no real uniform report that you can run per se. I've even seen some things that say ERC, they are custom made for Employee Retention Credit. Watch out for those things because they may not mean what you think that they mean.
They may mean stuff that you've already taken for instance. But the report that we need, I just clicked off a few of these from some of the more popular types of software, Gusto, they call it the payroll journal builder. Paychex. They call it the payroll journal. ADP calls it the payroll summary. QuickBooks calls it the payroll summary by employee report. That's very intuitive. That's exactly what we need. Paycom a little different. The best thing that we've seen through Paycom is customizing a report called the W two W three wages and tax report parenthesis all taxes in rent. So that's what those kind of look like across some of those, and there's a plethora of different types of payroll software. Okay? That's the first group of documents that we need in every case. Second group of documents that we need, it relates to the Paycheck Protection Program.
So if you took, as an employer, if you took the Paycheck Protection Program, there were two rounds of it 1.0, I call it 2.0. If you took either or both of those, we're going to need some documentation because we're going to, well, I'll explain the why here in just a second, but what we're looking for is PPP rounds one and or two need Paycheck Protection Program, loan forgiveness, application form, and acceptance letter if applicable. So if it was accepted, you had some forgiveness, that's great. You're going to need to subtract that out of the equation that we just talked about in the first set of documents. If you don't have this stuff and you don't have it readily available to you or your HR or your accounting department, or maybe your outside accountant, for sure, the banks that you use to administer this type of loans will have this type of information. They may not have the worksheets that you use to prove that these periods, that the PPP 1.0 or 2.0 all went to payroll, and I'll discuss that in just a second. Here's what they're called. Loan forgiveness application form 3508, OMB, control number
3204-07, and there's two expiration dates. The first iteration of PPP was 10 31 of 20. That was the form that was used. I called that PPP 1.0. 2.0. Expiration was 9/30, 2021. Okay, so look out for those two types of documents and any worksheets that was either provided or not to the bank, because that also helps us in this process. Why do we need this stuff? Again, you can't double dip with the ERC and the Paycheck Protection Program. You're going to have to subtract out the things, the money that you received for payroll from the PPP that was forgiven. So that's a very important distinction to make. You may have received a bunch of PPP, for instance, but it might not have all been forgiven. It might not have also been utilized for payroll. Be aware of that because those portions that either were not forgiven and or were not spent earmarked as the PPP required for payroll expenses.
And if you'll recall from PPP, that could include rent, utilities, mortgage interest and a few other things there that they allowed taxpayers businesses to ultimately spend their money on. Then you don't have to take that into the subtraction to the ERC calculation, but if you did, it certainly would be nice to look at what is the forgiven PPP. We ask taxpayers' businesses to see. We'd like to see when you received the PPP, so date of receipt, we'd like to see how much you received and what portion went to forgiven Paycheck Protection Program analysis over what period of time. So if you can show how it was spent really by quarter, that'd be fantastic. So worksheets in that process could help us with that as well. The third type of documentation that we're going to need is a client profit and loss statements for all of 2019, so Q1 through Q4 of 2019, and then we're going to need all of 2020 Q1 through four of 2020, and Q1 through Q3 of 2021, include four quarter four if you were a startup business, but again, most employers are Q1 through three, and the reason that we need this stuff is quite simply, this helps us determine one type of eligibility that could qualify a quarter under the ERC.
It's not the only eligibility requirement, it's the gross revenue reduction category that can get your business qualified. There's two others. We've gone over that a lot whether the business was fully or partially shut down, including any type of supply chain disruption as it relates to third parties who are under full or partial shutdown orders. So this is just one type that we need the PNLs for. We need to be able to compare a quarter in 2019 versus that same quarter in 2020 versus that same quarter in 2021, watched previous videos, if you really care about the minutiae of that, but just know that that really helps us out if we're doing your ERC calculations, it helps us to be able to qualify under that one specific type of requirement, which is the gross revenue reduction.
Finally this is kind of a wish but if you have the quarterly 9 41s available for the ones that we're going to be amending, that's how we now take the ERC credit, is by amending a quarterly return for 9 41 payroll. That would really help us out as well as we go to fill out the 9 41 x amended return to the credit. Okay? So it helps us with identifiers. There's some information that would readily and easily be transferred over to the 9 41 x, and it helps to have that documentation there as well. Okay. That's pretty much it in a nutshell. You get those things to us, then we can start looking at what the actual numbers in this process are going to look like for your ERC calculation. Of course, you have any other questions hit us up here on this weekly Q and A or give us a call at the number below. Thanks, and have a great day.