Author Topic: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K  (Read 2405 times)

SeattleCPA

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I don't know if people generally know this... but if you already own and operate a small business that employs nonfamily members, you possibly want to quickly learn about the employee retention credit and how you qualify for the recovery startup business version of the credit.

You'd need to have started a new trade or business sometime after 2/15/2020 and then before 9/30/2021 to get the full $100K or before 12/31/2021 to get $50K. Or you need to start a new trade or business in the next few weeks.

The actual amount of the credit equals 70% of the first $10K you pay an employee in a quarter. In any of your businesses. So you'd need roughly seven nonfamily member employees, minimum, to get full $50K a quarter.

Amazon is giving away a Kindle version of a book I wrote about this. I won't link to that but if you have more questions... I'll also try to monitor this thread in case anyone has additional questions that an answer to would benefit the group.

Oh, one other comment... Right now on twitter in the #taxtwitter thread, there are a group of us discussing whether a rental property works. I.e., whether you can get the $100K or whatever if you buy a rental property before 9/30/2021. FWIW, I'm nervous about that strategy. But a CPA friend who is a nationally respected employee retention credit expert thinks that gambit works.

youngwildandfree

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Fascinating.

How would the rental property work if you need to have non-family employees? Would you be arguing your property managers/maintenance people/etc are your employees?

SeattleCPA

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I don't think that approach works.

But the way the IRS guidance works if you had one business already established (a pizza parlor) that employed, just say, seven workers who make $10K a quarter, and then you added a rental and that activity qualifies as a new trade or business, you get the ERC on the seven pizza parlor workers. So that's $49K for the third and again $49K for the fourth quarter.

Bottomline: When you look at all your businesses together, you get the credit on all of them. So in above example, by starting a new business, you get ERC on the existing business.

BTW, I am not a big fan of the "rental as a business" thing... because it's not explicit in the new law (which is Section 3134 just in case someone wants to Google...

But CPAs I respect a ton think it works absolutely.

youngwildandfree

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Ah. Understood. Thanks for the response!

travel2020

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@SeattleCPA thanks for the info - very useful! I knew of ERC for last year but hadn’t heard about the program for this year.

I have some related questions:
- Our payroll processor ADP filed for ERC via amendments at my request around April or so but nothing so far. Do you have any insights on how long it takes for ERC to be processed and how to check status? I reached out to ADP abut they didn’t have anything aside from “IRS will let you know”.
- IIRC the ERC were for last year based on revenue drop etc. Where can I find more about the program for this year as our business is still down significantly vs pre-pandemic and would like to tap into any such programs available
- Re the new business/trade for the recovery credits, can the businesses be related? For example, a retail component and an online component split into separate business entities? We would have some shared resources in such a situation and wonder if that’s allowed.

I did go looking for your ebook but didn’t find it. If you have a link to post or PM, I’ll appreciate it.

Thanks!




SeattleCPA

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@SeattleCPA thanks for the info - very useful! I knew of ERC for last year but hadn’t heard about the program for this year.

I have some related questions:
- Our payroll processor ADP filed for ERC via amendments at my request around April or so but nothing so far. Do you have any insights on how long it takes for ERC to be processed and how to check status? I reached out to ADP abut they didn’t have anything aside from “IRS will let you know”.

Weeks and weeks, is what we're hearing from people. Sorry...

- IIRC the ERC were for last year based on revenue drop etc. Where can I find more about the program for this year as our business is still down significantly vs pre-pandemic and would like to tap into any such programs available
- Re the new business/trade for the recovery credits, can the businesses be related? For example, a retail component and an online component split into separate business entities? We would have some shared resources in such a situation and wonder if that’s allowed.

I did go looking for your ebook but didn’t find it. If you have a link to post or PM, I’ll appreciate it.

Thanks!

Here's a blog post about the recovery startup business in general: https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit/

Here's a discussion about how to get the $100K for a real estate rental investment: https://evergreensmallbusiness.com/the-100000-real-estate-employee-retention-credit-windfall/

A link to the Amazon.com page... btw they are regularly offering a "free" Kindle unlimited price but it's sort of random... not something I control: https://www.amazon.com/Maximizing-Employee-Retention-Credits-Qualifying-ebook/dp/B09CNRXMPR/ref=sr_1_2?dchild=1&qid=1629148442&refinements=p_27%3ANELSON&s=books&sr=1-2

It makes sense to bird dog this. Unbelievably good opportunity for some business owners. But the windpw closes in a few weeks on that first $50K... and then by end of year on that second $50K.
« Last Edit: August 23, 2021, 02:59:26 PM by SeattleCPA »

JDsNova

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I don't know if people generally know this... but if you already own and operate a small business that employs nonfamily members, you possibly want to quickly learn about the employee retention credit and how you qualify for the recovery startup business version of the credit.

You'd need to have started a new trade or business sometime after 2/15/2020 and then before 9/30/2021 to get the full $100K or before 12/31/2021 to get $50K. Or you need to start a new trade or business in the next few weeks.

The actual amount of the credit equals 70% of the first $10K you pay an employee in a quarter. In any of your businesses. So you'd need roughly seven nonfamily member employees, minimum, to get full $50K a quarter.

Amazon is giving away a Kindle version of a book I wrote about this. I won't link to that but if you have more questions... I'll also try to monitor this thread in case anyone has additional questions that an answer to would benefit the group.

Oh, one other comment... Right now on twitter in the #taxtwitter thread, there are a group of us discussing whether a rental property works. I.e., whether you can get the $100K or whatever if you buy a rental property before 9/30/2021. FWIW, I'm nervous about that strategy. But a CPA friend who is a nationally respected employee retention credit expert thinks that gambit works.
Just so I’m understanding this… is this something you apply for through a govt website or something you do work your tax guy when you file your 2021 taxes next year?

Thanks!


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travel2020

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Thanks @SeattleCPA! The links were helpful in clarifying things.

dandarc

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@JDsNova - claimed on your form 941. I think you can either request a check for the refund or choose to reduce payroll tax payments until you've zeroed out whatever you're owed.

This is a tax credit - if your business qualifies, and you properly claim it, then your business is entitled to the money. There is nothing to apply for - you either meet the requirements or you don't. If your payroll provider does the filing for your business, you do need to loop them in to get all the paperwork filed properly.

SeattleCPA

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Just so I’m understanding this… is this something you apply for through a govt website or something you do work your tax guy when you file your 2021 taxes next year?


If you qualify for an employee retention credit based on COVID-19 beating up your business, you want to have your payroll service make the calculations now and adjust the payroll tax deposits through the rest of the quarter.

BTW, I think the payroll services if you qualify for credit based on a decline in revenues just have you check a box and bingo they then calculate the credit automatically. This is the way you want to try and handle this.

If you have to aggregate businesses you own or apply constructive ownership rules, it gets massively trickier. And you probably need your tax accountant's help. That can get very expensive. But the refunds can quickly get enormous. Like $50K or $100K a quarter.

If you don't qualify for credits based on a decline in revenues or your business getting beat up by government orders that suspend your business, you can still qualify pretty easily if you have an existing trade or business that pays employees. What you need to do is see if you can start a new trade or business ASAP. Do that and you will get credits for the wages you pay in your existing business simply because you started a new business. That means you get up to $50K for Q3 and again for Q4. So in total $100K.

BTW over at Bogleheads, some poster is saying "Yeah I don't know why anyone would ever want to buy rentals..." And here's an answer. If you have an existing business paying employees, you can very possibly go buy a rental and get $100K of employee retention credits. I.e., a rental property can qualify as a new trade or business.
« Last Edit: August 23, 2021, 03:10:55 PM by SeattleCPA »

SeattleCPA

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@JDsNova - claimed on your form 941. I think you can either request a check for the refund or choose to reduce payroll tax payments until you've zeroed out whatever you're owed.

This is a tax credit - if your business qualifies, and you properly claim it, then your business is entitled to the money. There is nothing to apply for - you either meet the requirements or you don't. If your payroll provider does the filing for your business, you do need to loop them in to get all the paperwork filed properly.

+1

Greenstache

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I have some related questions:
- Our payroll processor ADP filed for ERC via amendments at my request around April or so but nothing so far. Do you have any insights on how long it takes for ERC to be processed and how to check status? I reached out to ADP abut they didn’t have anything aside from “IRS will let you know”. - I tangentially oversee some businesses who have filed for this for both Q1 and Q2 of 2021. Large providers seem to be having quite a surprising amount of difficulty processing these correctly.  As an example, one entity has still not gotten their timely filed Q1 ERC, but got part (not all) of their Q2 ERC claimed on the second quarter 941.  Paychex seems to really be struggling to handle this; hopefully ADP can do better
- IIRC the ERC were for last year based on revenue drop etc. Where can I find more about the program for this year as our business is still down significantly vs pre-pandemic and would like to tap into any such programs available I recommend CliftonLarsonAllen's ERC series. (I do not work for them / no affiliation, they've just done a great job in keeping a lot of experts working on this.) They do weekly free webcasts (usually Thursday afternoons) on the ERC program, and you can send in questions for them to answer live.
[/quote]

dandarc

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Suggest getting your IRS transcript for the relevant quarter - that is how we (church I'm VP of Finance for) discovered that the IRS had issued a check in August, but we obviously had not received it several months into 2021. The "replace missing check" form was processed and we did receive our check within weeks of submitting that request, but we had waited to hear from our payroll provider for several months before that - they were trying to find out by calling the IRS which has been near impossible. This was actually for the "original" ERC which we qualified for when we were briefly under a stay at home order.

I'll confess to not knowing any more than SeattleCPA has shared here regarding the Recovery Startup Business ERC, but for 2021, the "revenue down" regular ERC is available with just a 20% below 2019 same quarter threshold. In 2020, that number was 50%. I found out about that one here: https://forum.mrmoneymustache.com/taxes/moar-stimulus!-(draft-bill)/
« Last Edit: August 30, 2021, 11:12:40 AM by dandarc »

dandarc

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SeattleCPA's new blog post - timely for me. Q1 and Q2 covered by Q1 gross receipts decline for our church. But hadn't considered "starting a new line of business". Q3 and 4 look doubtful on gross receipts, although you never know until the money is in.

https://evergreensmallbusiness.com/houses-of-worship-and-nonprofits-miss-the-boat-on-employee-retention-credits/

I'm wondering if there isn't a way to get that new line of business going for the church quickly. It would take us 3 years to actually decide to buy that rental property as in the example in the blog post. Been thinking "what if we ran a co-working space out of our mostly unused building during the week". But of course we already do rent the place out from time to time for various events (I mean, not so much since pandemic, but we did). We also received some artwork with reproduction rights since pandemic started - vague ideas of "put it on a coffee mug!", but that's going to be more like a fundraiser either for the church in general or for an already existing program of the church.
« Last Edit: August 30, 2021, 03:05:03 PM by dandarc »

SeattleCPA

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I have some related questions:
- Our payroll processor ADP filed for ERC via amendments at my request around April or so but nothing so far. Do you have any insights on how long it takes for ERC to be processed and how to check status? I reached out to ADP abut they didn’t have anything aside from “IRS will let you know”. - I tangentially oversee some businesses who have filed for this for both Q1 and Q2 of 2021. Large providers seem to be having quite a surprising amount of difficulty processing these correctly.  As an example, one entity has still not gotten their timely filed Q1 ERC, but got part (not all) of their Q2 ERC claimed on the second quarter 941.  Paychex seems to really be struggling to handle this; hopefully ADP can do better
- IIRC the ERC were for last year based on revenue drop etc. Where can I find more about the program for this year as our business is still down significantly vs pre-pandemic and would like to tap into any such programs available I recommend CliftonLarsonAllen's ERC series. (I do not work for them / no affiliation, they've just done a great job in keeping a lot of experts working on this.) They do weekly free webcasts (usually Thursday afternoons) on the ERC program, and you can send in questions for them to answer live.
[/quote]

I don't have much to add to Greenstache's comments above, but one remark related to the payroll services...

I think they can apply really simple ERC qualification rules. E.g., if a small eligible employer experiences a substantial decline in gross receipts in 2021 (so more than twenty percent), they can pretty easily calculate the "seventy percent of eligible employees' wages but not more than $7K a quarter" amount.

Furthermore, if a really simple calculation like that just given produces the right result for something like a recovery startup business, my experience is they let you do that too. (I.e., they may not know how the recovery startup business credit works... but if you say "just calculate the same amount as you would for a substantial decline credit" they let you do that.

I've said this earlier in thread, but if you can, you want to have the payroll service do the credit for the current quarter. That should be easy. Often it should be you simply checking a box.

If an employer needs to go back and amend previous quarters' already filed 941s, that is way more work.

SeattleCPA

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SeattleCPA's new blog post - timely for me. Q1 and Q2 covered by Q1 gross receipts decline for our church. But hadn't considered "starting a new line of business". Q3 and 4 look doubtful on gross receipts, although you never know until the money is in.

https://evergreensmallbusiness.com/houses-of-worship-and-nonprofits-miss-the-boat-on-employee-retention-credits/

I'm wondering if there isn't a way to get that new line of business going for the church quickly. It would take us 3 years to actually decide to buy that rental property as in the example in the blog post. Been thinking "what if we ran a co-working space out of our mostly unused building during the week". But of course we already do rent the place out from time to time for various events (I mean, not so much since pandemic, but we did). We also received some artwork with reproduction rights since pandemic started - vague ideas of "put it on a coffee mug!", but that's going to be more like a fundraiser either for the church in general or for an already existing program of the church.

I think the easiest way to become eligible, no matter if you're a for-profit or not-for-profit, is to have a government order fully suspend your "business." Where I live, for example, churches, mosques, temples, synagogues were prohibited from congregating through, I think, June 30, 2021... And even now, I would wonder whether they can really conduct normal operations given the newest delta related restrictions.

The second easiest way, IMHO, is to be down the required percentage. So down more than 20 percent in 2021 quarter as compared to 2019 quarter.

Third easiest way, again IMHO, is to be partially suspended. I.e., some more than nominal part of the "business" is closed due to a government order.

The hardest way, sorry again IMHO, is to use the recovery startup business route. That route works. But you need to start a new trade or business after 2/15/2020, need the organization to have average annual gross receipts over previous three years of not more than $1M, and need to have the new trade or business fully "going concern" by the quarter for which you claim ERC.

The other semi-awkward issue here. The recovery startup business guidance (appears in IRS Notice 2021-49) says the thing you start needs to rise to the level of a Section 162 trade or business. That's sort of a wispy concept to grab ahold of. But basically it means you're motivated by profits and then engaging in the activity with regularity and continuity. So three key concepts there: profit-motivated, regularity and continuity.

And so now--and sorry for the long ramble--when you circle back to your church, or my church, or other readers' houses of worship or nonprofits, they probably aren't "profit motivated"... that's probably not critical. The statute (sections 2301(c)(2)(A)(i)) itself says the trade or business requirement doesn't apply to tax-exempt organizations. IRS says in its guidance that tax-exempts are considered just as a matter of law to be conducting trades or businesses. But it's all a little awkward.

And then you still have the regularity and continuity requirements.

So I guess what I think is, you can get the recovery startup business thing to work. But it's not a great way for something like a church to get ERCs. Further, because you're going to be weaker at least optically because of the lack of profit motive, I would think you'd want to be really robust on the regularity and continuity thing.

You'd also want to make sure the new thing wasn't an expansion of the existing "business". And keep separate or separable books and records.

dandarc

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Hmm. Separable books is actually not a problem for us - we actually have this thing we call a "church fund" for special purpose projects such that we could easily segregate for reporting. We sort of would have a profit motive for the activity - make more money for the church at large. Of course the church itself by definition does not have a profit motive.

Starting to think I could spin the co-working space idea in a way that could meet the rules. As opposed to just renting the space out, it would be actually operating a business within the space. I guess I mean more that I could convince myself and maybe my committee. But the sticking point is always going to be "takes too long to get all the people on board who need to approve it". Plus our campus is essentially closed even to members right now. Covid is real bad here right at the moment. Our church skews even older than most so we're being exceptionally cautious, despite very high vaccination rates in our congregation. And we're just starting an interim ministry period. And we've already got a proposal for reallocating space to better meet RE needs once we're back in person. I think playing games to get more tax credits will be even more poorly received than it was back in February when I was telling a few people "you know, if people happened to make donations in April instead of March . . ."
« Last Edit: August 31, 2021, 08:23:23 AM by dandarc »

SeattleCPA

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Plus our campus is essentially closed even to members right now. Covid is real bad here right at the moment. Our church skews even older than most so we're being exceptionally cautious, despite very high vaccination rates in our congregation. And we're just starting an interim ministry period. And we've already got a proposal for reallocating space to better meet RE needs once we're back in person. I think playing games to get more tax credits will be even more poorly received than it was back in February when I was telling a few people "you know, if people happened to make donations in April instead of March . . ."

BTW if you guys are closed or some part of the operation is closed due to a state or local government order? You already qualify for ERC... so you don't need to start a new firm.

E.g., where I am, I think from around April 2020 through at least June 30, state government orders closed things like houses of worship, auditoriums, lecture halls etc. So the thing our church missed (but is now correcting) is that they should have taken a $5K per employee credit in 2020 and a $7K per employee per quarter credit for at least the first quarters in 2021.

These credits are actually better than recovery startup business credits...E.g., you can only have $50K a quarter in ERC due to recovery startup business eligibility.


dandarc

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Plus our campus is essentially closed even to members right now. Covid is real bad here right at the moment. Our church skews even older than most so we're being exceptionally cautious, despite very high vaccination rates in our congregation. And we're just starting an interim ministry period. And we've already got a proposal for reallocating space to better meet RE needs once we're back in person. I think playing games to get more tax credits will be even more poorly received than it was back in February when I was telling a few people "you know, if people happened to make donations in April instead of March . . ."

BTW if you guys are closed or some part of the operation is closed due to a state or local government order? You already qualify for ERC... so you don't need to start a new firm.

E.g., where I am, I think from around April 2020 through at least June 30, state government orders closed things like houses of worship, auditoriums, lecture halls etc. So the thing our church missed (but is now correcting) is that they should have taken a $5K per employee credit in 2020 and a $7K per employee per quarter credit for at least the first quarters in 2021.

These credits are actually better than recovery startup business credits...E.g., you can only have $50K a quarter in ERC due to recovery startup business eligibility.
Should have mentioned - we're in Florida. Even if our city or county wanted to close churches, the state would likely step in to try and stop it. So while I think we actually should lock down to that level again, I don't think it will actually happen here. But for others - yeah that one is real easy for the payroll providers. Ours even reached out to us with the exact figures we could claim unsolicited in July 2020.

SeattleCPA

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #19 on: September 01, 2021, 01:55:53 PM »
If this is inappropriate, let me know (privately or publicly) and I'll delete.

But I've had folks ask some questions again and again about the $100K credit and finally just did a blog post that answers pretty much the common ones:

https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit-nine-awkward-questions/

The questions and the TLDR summary:

1. Does new trade or business need its own employees? (Answer: No.)
2. Can new trade or business have activity prior to February 15, 2020? (Answer: Yes.)
3. Does new trade or business need to operate in Q3 and Q4 of 2021? (Answer: No.)
4.  What if new trade or business fails? (Answer: You still get credit.)
5. Is there a minimum length of operation requirement? (Answer: No.)
6. Is there a minimum size or income requirement? (Answer: No but think about this...)
7. Does rental property work? (Answer: Probably if you do it right.)
8. Can you acquire a business that already exists? (Answer: Yes.)
9. What are you chances of being audited? (Answer: High, so you want to do this right.)

rae09

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #20 on: September 02, 2021, 06:43:05 PM »
@SeattleCPA  Would someone with the following situation qualifies for the Recovery Startup Business ERC?

- Started a business in early 2021 so can't qualify based on decline in gross receipts
- Revenue under $1M
- Doesn't own any other businesses
- Going to employ a person who's not a family member

I read your blog (https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit/) and these paragraph makes me think she would qualify for the recovery ERC but not sure I'm understanding it correctly.

"A trade or business you start after February 15, 2020.
A situation where the employer’s average annual gross receipts do not exceed $1,000,000.
Finally, a situation where the employer would not qualify for employee retention credits under the usual rules."
« Last Edit: September 02, 2021, 06:45:35 PM by rae09 »

Michael in ABQ

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #21 on: September 02, 2021, 08:28:02 PM »
So I just bought a business and started operating at the end of July. Right now it's just my wife and I on payroll so that won't count. However, we have one person working for us I had planned to classify as an independent contractor. She is a seamstress and is sewing a product for us on a piece-work basis. For August I paid her in cash about $500, part of which was reimbursement for purchasing materials.

Does this tax credit only apply to employees? Or can independent contractors apply too?

Realistically I expect to pay her less than $1,000 per month for the rest of the year, so total wages would probably only be a few thousand dollars for 2021. However, if we're going to get a tax credit for 70% of her wages obviously it makes sense to classify her as an employee. It also means hiring any other employees right now would be a wise move since we'll essentially be paying them $0.30 on the dollar.

SeattleCPA

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #22 on: September 03, 2021, 05:27:12 AM »
@SeattleCPA  Would someone with the following situation qualifies for the Recovery Startup Business ERC?

- Started a business in early 2021 so can't qualify based on decline in gross receipts
- Revenue under $1M
- Doesn't own any other businesses
- Going to employ a person who's not a family member

I read your blog (https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit/) and these paragraph makes me think she would qualify for the recovery ERC but not sure I'm understanding it correctly.

"A trade or business you start after February 15, 2020.
A situation where the employer’s average annual gross receipts do not exceed $1,000,000.
Finally, a situation where the employer would not qualify for employee retention credits under the usual rules."


Yes, that should qualify. It needs to be a "real" business. You need to be a full "going concern" and through any startup phase. And you need W-2 wages paid to a non-family-member employee. But meet those prerequisites and, bingo, you get the credit.

The credit equals 70 percent of the up to the first $10K of wages and health insurance you pay a non-family member employee.

E.g., if in Q3 you pay $5000 to a single employee, you put a $3500 credit on the 941 for the third quarter.

If in Q4, you have three employees you pay $5000 to, you put a $10,500 credit on the 941 for the fourth quarter.

SeattleCPA

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #23 on: September 03, 2021, 05:31:10 AM »
So I just bought a business and started operating at the end of July. Right now it's just my wife and I on payroll so that won't count. However, we have one person working for us I had planned to classify as an independent contractor. She is a seamstress and is sewing a product for us on a piece-work basis. For August I paid her in cash about $500, part of which was reimbursement for purchasing materials.

Does this tax credit only apply to employees? Or can independent contractors apply too?

Realistically I expect to pay her less than $1,000 per month for the rest of the year, so total wages would probably only be a few thousand dollars for 2021. However, if we're going to get a tax credit for 70% of her wages obviously it makes sense to classify her as an employee. It also means hiring any other employees right now would be a wise move since we'll essentially be paying them $0.30 on the dollar.

So good thoughts... and yes, I think you want to reexamine how you classify her...

I mean, if she's really an independent contractor, you shouldn't mislabel her a W-2 employee. Also, it would be weird to say she's W-2 in Q3 and Q4 and then 1099 starting in 2022.

But firms should look at moving folks from 1099 status to W-2 status if possible if they qualify for employee retention credits based on recovery startup business eligibility.

As you note, it can be a big number in Q3 and Q4 if you get Uncle Sam to pick up 70% of the wages.

Michael in ABQ

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #24 on: September 03, 2021, 10:17:24 AM »
So I just bought a business and started operating at the end of July. Right now it's just my wife and I on payroll so that won't count. However, we have one person working for us I had planned to classify as an independent contractor. She is a seamstress and is sewing a product for us on a piece-work basis. For August I paid her in cash about $500, part of which was reimbursement for purchasing materials.

Does this tax credit only apply to employees? Or can independent contractors apply too?

Realistically I expect to pay her less than $1,000 per month for the rest of the year, so total wages would probably only be a few thousand dollars for 2021. However, if we're going to get a tax credit for 70% of her wages obviously it makes sense to classify her as an employee. It also means hiring any other employees right now would be a wise move since we'll essentially be paying them $0.30 on the dollar.

So good thoughts... and yes, I think you want to reexamine how you classify her...

I mean, if she's really an independent contractor, you shouldn't mislabel her a W-2 employee. Also, it would be weird to say she's W-2 in Q3 and Q4 and then 1099 starting in 2022.

But firms should look at moving folks from 1099 status to W-2 status if possible if they qualify for employee retention credits based on recovery startup business eligibility.

As you note, it can be a big number in Q3 and Q4 if you get Uncle Sam to pick up 70% of the wages.

We've already got worker's compensation insurance so really the only difference between 1099 and W-2 is we'd be responsible for that 7.65% Payroll tax - which won't be much on several thousand of compensation for Q3 and Q4.

Looking at the various tests/factors of Employee vs. IC, it's a tossup. She has her own equipment but we're providing materials and did reimburse her for some equipment. We're not directing specific hours and she is working from home, but she could also be working in-house.

SeattleCPA

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #25 on: September 03, 2021, 11:25:06 AM »
We've already got worker's compensation insurance so really the only difference between 1099 and W-2 is we'd be responsible for that 7.65% Payroll tax - which won't be much on several thousand of compensation for Q3 and Q4.

Looking at the various tests/factors of Employee vs. IC, it's a tossup. She has her own equipment but we're providing materials and did reimburse her for some equipment. We're not directing specific hours and she is working from home, but she could also be working in-house.

I think you've got a good grasp of the issues.

Also this note... A compulsive personality requires me to note that the recovery startup business employee retention credit only applies to Q3 and Q4 of 2021... Obviously the 7.65% payroll tax goes on forever...

Michael in ABQ

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #26 on: September 03, 2021, 12:48:35 PM »
We've already got worker's compensation insurance so really the only difference between 1099 and W-2 is we'd be responsible for that 7.65% Payroll tax - which won't be much on several thousand of compensation for Q3 and Q4.

Looking at the various tests/factors of Employee vs. IC, it's a tossup. She has her own equipment but we're providing materials and did reimburse her for some equipment. We're not directing specific hours and she is working from home, but she could also be working in-house.

I think you've got a good grasp of the issues.

Also this note... A compulsive personality requires me to note that the recovery startup business employee retention credit only applies to Q3 and Q4 of 2021... Obviously the 7.65% payroll tax goes on forever...

True. But 70% of 4-5 months pay = a few years of future payroll taxes.

rae09

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #27 on: September 03, 2021, 05:50:36 PM »
@SeattleCPA  Would someone with the following situation qualifies for the Recovery Startup Business ERC?

- Started a business in early 2021 so can't qualify based on decline in gross receipts
- Revenue under $1M
- Doesn't own any other businesses
- Going to employ a person who's not a family member

I read your blog (https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit/) and these paragraph makes me think she would qualify for the recovery ERC but not sure I'm understanding it correctly.

"A trade or business you start after February 15, 2020.
A situation where the employer’s average annual gross receipts do not exceed $1,000,000.
Finally, a situation where the employer would not qualify for employee retention credits under the usual rules."


Yes, that should qualify. It needs to be a "real" business. You need to be a full "going concern" and through any startup phase. And you need W-2 wages paid to a non-family-member employee. But meet those prerequisites and, bingo, you get the credit.

The credit equals 70 percent of the up to the first $10K of wages and health insurance you pay a non-family member employee.

E.g., if in Q3 you pay $5000 to a single employee, you put a $3500 credit on the 941 for the third quarter.

If in Q4, you have three employees you pay $5000 to, you put a $10,500 credit on the 941 for the fourth quarter.


Thank you so much for confirming and for writing this PSA!

SeattleCPA

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Re: PSA: That "Recovery Startup Business" Employee Retention Credit equals $100K
« Reply #28 on: September 07, 2021, 11:13:43 AM »
@SeattleCPA  Would someone with the following situation qualifies for the Recovery Startup Business ERC?

- Started a business in early 2021 so can't qualify based on decline in gross receipts
- Revenue under $1M
- Doesn't own any other businesses
- Going to employ a person who's not a family member

I read your blog (https://evergreensmallbusiness.com/recovery-startup-business-employee-retention-credit/) and these paragraph makes me think she would qualify for the recovery ERC but not sure I'm understanding it correctly.

"A trade or business you start after February 15, 2020.
A situation where the employer’s average annual gross receipts do not exceed $1,000,000.
Finally, a situation where the employer would not qualify for employee retention credits under the usual rules."


Yes, that should qualify. It needs to be a "real" business. You need to be a full "going concern" and through any startup phase. And you need W-2 wages paid to a non-family-member employee. But meet those prerequisites and, bingo, you get the credit.

The credit equals 70 percent of the up to the first $10K of wages and health insurance you pay a non-family member employee.

E.g., if in Q3 you pay $5000 to a single employee, you put a $3500 credit on the 941 for the third quarter.

If in Q4, you have three employees you pay $5000 to, you put a $10,500 credit on the 941 for the fourth quarter.


Thank you so much for confirming and for writing this PSA!

:-)

Zeitgeist

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Is it possible to file a 941-x for 2020 to claim the ERC at this late date?  Or did the deadline pass for 2020?  My research indicates that we have 3 years from the filing of the 941. 

This thread has been enlightening.  Thank you all.

SeattleCPA

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Is it possible to file a 941-x for 2020 to claim the ERC at this late date?  Or did the deadline pass for 2020?  My research indicates that we have 3 years from the filing of the 941. 

This thread has been enlightening.  Thank you all.

You absolutely can amend 2020 941s to get ERCs.

And then the bad part of this: When you amend the 2020 941 or 941s to, for example, show a few $5K credits, you'll need to go back and amend the business tax return and any affected 1040 returns.

Example: You apply for some ERC credits for your S corporation using the 2020 Q3 941. Once you do that, you need to amend the 2020 1120S return... and then your own 2020 1040 return.

Tangential comment: I'm still hearing that people are waiting months to get the ERC money.

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This is something I need to get on.

Started a business with operations starting March 2020. Hired 2 employees between 2nd-3rd quarter 2021.  Seems I am an ideal case for this.

SeattleCPA

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You are the business owner "targeted" for these credits. And I mean that in a good way.

Probably your credits equal 70% of the wages and health insurance you provided each employee... but no more than $7K per employee per quarter... and not more than $50K in a quarter. And this only applies for Q3 and Q4...

So if you hired in Q2, no ERC...

And if you paid that one PT employee $3K in Q3, that's a $2100 ERC.

But just to be CRAZY say you hired 20 employees in Q4 and coincidentally paid each of these folks $5K exactly... That would mean get the lesser or 70% times 20 times $5K... or $50K... so $50K.

Good you're looking at this and learning about this. I think a bunch of small business owners will discover they missed the boat at some point down the road.

Kroaler

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Its insane that there really isn't a good distribution channel for this information.  I guess that's where having a proper business accountant comes in. (I promise its on my todo list!)

Thanks again for posting this information.   I mean - It just seems like free money for being a business that was hiring.  Who doesn't want that!?

SeattleCPA

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Its insane that there really isn't a good distribution channel for this information.

I don't blame IRS. They've been underfunded to do job Congress and we taxpayers ask/expect them to do... but they were not the right type of agency to promote something like this. I think small businesses left billions of dollars on the table...


I guess that's where having a proper business accountant comes in. (I promise its on my todo list!)

My first impulse was to post a comment that says, "Any tax accountant with $1M or less of average revenues--and most guys average less than $1M--should have engineered a recovery startup business employee retention credit for themselves... It was SOOOOOOO easy to do this. So look for someone smart and proactive enough to do this..."

But to be fair the tax accountants like the IRS and many other small businesses got swamped during the pandemic.

So while I wish my sister and brother tax accountants were doing a better job on this stuff, I fear most business owners probably just need to be proactive about this stuff. Keeping their eyes open for these sorts of opportunities. And then staying wary of the threats that blindside.

Note: The other thing is, if you can find someone who does stay on top of this stuff, IMHO, that's worth a lot. And you can in some cases though not all justify paying a premium.

BTW from your post in the PPC thread, I see you have an HVAC business? Or did? So the recovery startup business employee retention credit (RSV ERC) looks at that. Essentially if you have two businesses, the ERC formulas combine those businesses into a single "employer"...

E.g., if you have an HVAC business and you start a wash and fold laundry service? The RSV ERC looks at those two trades or businesses together. And if your HVAC business showed average gross receipts of $1M or less for 2018-2020, you starting a wash and fold laundry in Q4 (needs to really be started) means you get the RSV ERC on wages paid by the HVAC business and the wash and fold laundry. (Up to $50K for the quarter.)


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"a small business that employs nonfamily members..."

What constitutes as non-family - how close a relative still counts as a family member? More Specifically to somebody I know with a business - their employee is a nephew, who has a different last name and even lives in a different state, FWIW. Would that employee who happens to be a nephew of the owner, disqualify them from this program then?

SeattleCPA

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Sorry, but a nephew (or niece) counts as a family employee.

BTW, Dan Chodan, a nationally known expert on ERC, did a blog post for our little blog on this subject: https://evergreensmallbusiness.com/when-owner-wages-become-ineligible-for-the-employer-retention-credit/

Michael in ABQ

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Sorry, but a nephew (or niece) counts as a family employee.

BTW, Dan Chodan, a nationally known expert on ERC, did a blog post for our little blog on this subject: https://evergreensmallbusiness.com/when-owner-wages-become-ineligible-for-the-employer-retention-credit/

So as 51% owner and my wife is 49%, I assume her wages (and mine) are disqualified for the ERC?

Is there any minimum time for employment? We had one employee that moved and took another job after about two months. Her replacement worked for 6 days and decided it wasn't a good fit and didn't come back.

SeattleCPA

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Sorry, but a nephew (or niece) counts as a family employee.

BTW, Dan Chodan, a nationally known expert on ERC, did a blog post for our little blog on this subject: https://evergreensmallbusiness.com/when-owner-wages-become-ineligible-for-the-employer-retention-credit/

So as 51% owner and my wife is 49%, I assume her wages (and mine) are disqualified for the ERC?

Is there any minimum time for employment? We had one employee that moved and took another job after about two months. Her replacement worked for 6 days and decided it wasn't a good fit and didn't come back.

Both husband and wife wages fail to generate ERC. Sorry.

But one small bit of good news. No minimum time for employment. E.g., if some nonfamily-member employee worked one day and earned $10K, you could get the $7K ERC for that person assuming employer was eligible for one of those standard reasons: substantial decline in gross receipts... or full or partial suspension... or being a recovery startup business.