An Important Reminder Regarding ERC Qualification and your Business’s Q1 2021 Form 941
As a reminder to Walz Group clients and friends, small business owners may be eligible for the Employee Retention Credit (ERC) for the Q1 2021 if your Q4 2020 revenue was at least 20% lower than your Q4 2019 revenue, or if your Q1 2021 revenue was 20% lower than your Q1 2019 revenue. In addition, if your business was subject to shutdown orders during the quarter, you may be eligible for the tax credit. As the Q1 2021 winds down this week, we encourage you to be cognizant of your eligibility for this tax credit. NOTE: The IRS is requiring the use of your Tax Basis reporting to calculate the revenue reduction – not Financial Statement reporting.
If the Walz Group prepares your quarterly payroll tax returns, where these credits are claimed, we have been or will be in discussion with you about the tax credit. If you prepare or another third-party provider prepares your business’s returns, you will want to determine your eligibility in the very near future. Many third-party providers require information on the ERC within a few days from quarter end. If you have any questions about the ERC, please contact your Walz Group partner and we will be glad to discuss the matter with you.
As you evaluate your business’s eligibility for ERC, consider the following questions:
1. Was my business’s revenue 20% lower in Q4 2020 2020 vs Q4 2019? If the answer is “yes,” then you qualify for ERC for at least the Q1 2021.
2. Do I believe that my revenue will be 20% lower for Q1 2021 vs 2019? Remember that knowing if you are using cash or accrual basis for tax purposes is important. The answer to this question is a bit more complex if you are on a completed contract or percentage of completion methods. Regardless, it’s not too early to start evaluating that computation if you think it will be close.
NOTE: If #1 or #2 above applies to your business, you need to move quickly to claim in the 1st quarter of 2021. If you prepare your own Form 941 you have until May 10, 2021 to file if you made all of your deposits on time. If not, then the form must be filed by April 30, 2021. This is a little known rule that applies only to Forms 941 and not the rest of your business quarterly returns.
3. When do I need to let my third-party payroll service know if I am eligible for the ERC? For ADP clients who use the Workforce platform, the deadline to get information to ADP is April 8, 2021. Walz Group is working with ADP to find out their deadline for the Run platform, but it will be in the first half of April. Therefore there is no time to delay if you want to claim in Q1 2021 and you utilize a payroll service – ADP or another provider.
4. If I took Payroll Protection Program 2 (PPP2) money am I disqualified from the ERC? No, you are not; but you may not use the same wages for both ERC and PPP2 forgiveness. This is a situation where discussing the details with us is helpful. This is especially true if you do not anticipate being down 20% from the comparable quarter in 2019 for quarters two and three of 2021.
5. This sounds like a lot of work – can we just amend the Form 941 later to claim the credit? Yes you can. However, the Walz Group believes that including the ERC on your Q1 2021 Form 941 return will allow you to receive a more timely refund than would amending it at a later date.
Another important reminder: If you qualify for ERC on the basis of 20% lower revenue in Q1 2021 vs Q1 19, you automatically qualify for ERC in the Q2 2021. Knowing this should help you prepare information needed for the Q2 2021 941 return to be filed in July 2021.
Important Payroll Protection Program 2 (PPP2) Update
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