Employee Retention Tax Credit: Definition and Qualification Criteria
In the wake of the COVID-19 pandemic, many law firms may be unaware that they could potentially benefit from the Employee Retention Credit (ERC), a financial incentive designed to help businesses keep employees on their payroll during challenging times.
### Eligibility Criteria for Law Firms
To qualify for the ERC, law firms must have carried on a trade or business during the calendar quarter and either:
1. Experienced a full or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings related to COVID-19. 2. Experienced a significant decline in gross receipts—more than 50% decline in 2020, and less than 80% of gross receipts compared to the same quarter in 2019 for 2021 quarters.
Recovery startup businesses also qualify under certain conditions. Law firms may be subject to controlled group rules, meaning if part of a parent-subsidiary or brother-sister group (multiple entities under common ownership), all must be treated as a single employer for ERC purposes, affecting employee count and eligibility.
### Covered Quarters and Credit Amounts
For 2020, the credit was 50% of qualified wages up to $10,000 per employee annually, maxing at $5,000 per employee. Covered quarters start from Q1 2020 with eligibility based on either suspension or revenue decline. For 2021, the credit increased to 70% of qualified wages up to $10,000 per employee per quarter, maxing at $7,000 per employee per quarter. Eligibility criteria slightly relaxed, including a broader gross receipts test (less than 80% of 2019 receipts).
### Calculating and Maximizing the Credit
To maximise a claim for the ERC, it's essential to know which specific quarters apply and how to calculate eligible wages. Qualified Wages include wages paid plus allocable qualified health plan expenses. In determining “small” vs. “large” employer size for credit calculation, the employee count includes full-time employees across controlled groups, so aggregation is critical to maximise credits. Law firms should calculate carefully to ensure no overlap with other relief benefits like PPP loans, as wages counted for PPP forgiveness cannot also be counted for ERC.
### Helpful Resources and Considerations
The IRS issued Notice 2021-20 providing detailed FAQs and guidance on how to claim the credit, interpret key terms, and meet record-keeping requirements. Some recent legislation sets deadlines and limitations on claims and refunds, such as disallowing claims filed after January 31, 2024, or limiting refunds for certain quarters. Law firms must file timely to avoid disallowed claims. Professional advisory firms and tax software tools offer calculators and step-by-step guides tailored to ERC claims, which can be valuable for law firms to accurately assess credit amounts.
In summary, to determine eligibility and maximise claims for the Employee Retention Credit (ERC) in law firms, it is essential to understand the qualification criteria, covered quarters, and calculation methods, along with helpful resources for accurate filing. Consulting with tax professionals familiar with ERC nuances can ensure maximum credits are claimed correctly and timely. Many law firms may be eligible for the ERC without realizing it due to confusion, misinformation, or fear of IRS involvement.
To ensure that law firms can take advantage of the Employee Retention Credit (ERC) to improve their financial standing, understanding the eligibility criteria is crucial. For instance, law firms must show a significant decline in gross receipts or a full or partial suspension of operations due to COVID-19 related governmental orders. In addition, managing personal-finance and the business's finances efficiently can help law firms maximize the ERC. By using tools such as tax software and professional advisory resources, law firms can accurately calculate the credits, stay informed about the latest eligibility requirements, and prevent missed opportunities related to the ERC.
