Understanding the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a tax credit that offers eligible employers the opportunity to receive a refundable tax credit of up to $5,000 per employee for 2020 and $7,000 per quarter for the first three quarters of 2021. Law firms in the US may be eligible for the ERTC if they meet certain criteria. Here's what you need to know about the ERTC:
Definition and Purpose of ERTC
ERTC is a payroll tax credit that was designed to help businesses retain their employees during the COVID-19 pandemic. The credit aims to incentivize employers to keep employees on their payroll, even if their business has been negatively impacted by the pandemic. The ERTC is a refundable tax credit, meaning that if the amount of the credit exceeds the employer's payroll tax liability, the employer is eligible to receive a refund for the excess amount.
Eligibility Requirements for ERTC
To qualify for the ERTC, law firms must meet certain eligibility requirements, including:
- Experiencing a suspension of business operations due to a government order related to COVID-19 OR
- Experiencing a significant decline in gross receipts
Criteria for Qualifying Wages
The ERTC applies to qualified wages that are paid to employees during the eligibility period. Qualified wages differ depending on the size of the company and the eligibility period. For employers with 500 or fewer full-time employees, qualified wages include wages paid to employees during the eligibility period, regardless of whether the employee is providing services. For employers with more than 500 full-time employees, qualified wages are limited to wages paid to employees who are not providing services.
Gross Receipts Requirements
To qualify for the ERTC based on a significant decline in gross receipts, law firms must demonstrate that their gross receipts have declined by 20% or more in a calendar quarter compared to the same calendar quarter in the previous year. Alternatively, law firms can qualify for the ERTC if they have experienced a decline of 20% or more in gross receipts over a consecutive three-month period.
Calculation of ERTC for 2020 and 2021
The amount of the ERTC that a law firm is eligible to receive depends on various factors, including the number of employees and the amount of qualified wages. Here's what you need to know about the calculation of the ERTC:
Maximum Credit per Employee
For 2020, the maximum credit per employee is $5,000. For the first two quarters of 2021, the maximum credit per employee is $7,000 per quarter. The maximum credit per employee for the third quarter of 2021 is $28,000.
Credit per Quarter
The amount of the ERTC that a law firm is eligible to receive depends on the number of qualified wages paid during the quarter. For the first two quarters of 2021, the credit applies to wages paid between January 1, 2021, and June 30, 2021. For the third quarter of 2021, the credit applies to wages paid between July 1, 2021, and September 30, 2021.
Importance of Keeping Accurate Records
To maximize the ERTC, law firms need to keep accurate records of their payroll and other expenses. Accurate record-keeping ensures that law firms can claim the maximum amount of credit for which they are eligible. It's important for law firms to seek professional advice to ensure that their records are accurate and complete.
How Law Firms Can Qualify for ERTC
To qualify for the Employee Retention Tax Credit (ERTC), law firms must meet specific eligibility requirements based on their business operations and gross receipts. Here's what you need to know about how law firms can qualify for ERTC:
Suspension of Business Operations
According to Dickinson Law Firm, law firms must have experienced a full or partial suspension of their business operations to qualify for the ERTC. A full suspension is when the law firm's operations were entirely shut down due to a government order related to the COVID-19 pandemic. A partial suspension is when the law firm's operations were significantly reduced due to a government order related to the COVID-19 pandemic.
Explanation of a Full or Partial Suspension
A full suspension of business operations is relatively straightforward to understand. The law firm's operations were entirely shut down due to a government order related to the COVID-19 pandemic. A partial suspension, on the other hand, can be more complicated. A partial suspension is when the law firm's operations were significantly reduced due to a government order related to the COVID-19 pandemic.
Examples of Business Suspensions
Some examples of a full or partial suspension of business operations that may qualify law firms for the ERTC include:
- A law firm that was ordered to close its physical office space due to a government order related to the COVID-19 pandemic
- A law firm that was ordered to reduce its operations to essential services only due to a government order related to the COVID-19 pandemic
- A law firm that experienced a significant reduction in client demand due to the COVID-19 pandemic
Significant Decline in Gross Receipts
Law firms can also qualify for the ERTC if they have experienced a significant decline in their gross receipts. Gross receipts refer to all of the law firm's revenue from all sources without subtracting any costs or expenses.
Definition of Gross Receipts
According to Disaster Loan Advisors, gross receipts include all revenue from the law firm's business operations, including sales, services, interest, and dividends. Gross receipts do not include any cost of goods sold or expenses related to generating the revenue.
Calculation of Gross Receipts Decline
To qualify for the ERTC based on a significant decline in gross receipts, law firms must demonstrate that their gross receipts have declined by 20% or more in a calendar quarter compared to the same calendar quarter in the previous year. Alternatively, law firms can qualify for the ERTC if they have experienced a decline of 20% or more in gross receipts over a consecutive three-month period. According to Cherry Bekaert, the safe harbor provided by Rev. Proc. 2021-33 allows law firms to exclude forgiven Paycheck Protection Program loans from the definition of gross receipts.
Examples of Gross Receipts Decline
Some examples of a significant decline in gross receipts that may qualify law firms for the ERTC include:
- A law firm that experienced a reduction in client demand due to the COVID-19 pandemic, resulting in a decline in revenue
- A law firm that had to cancel or postpone scheduled legal services due to the COVID-19 pandemic, resulting in a decline in revenue
- A law firm that experienced a decline in revenue due to supply chain disruptions or other indirect effects of the COVID-19 pandemic
How Much Can Law Firms Claim with ERTC?
The amount of ERTC that a law firm can claim depends on the number of employees and qualified wages paid during the eligible period. Here's what you need to know about how much law firms can claim with ERTC:
Maximum Amount of ERTC
According to Disaster Loan Advisors, law firms can claim up to 50% of qualified wages paid between March 12th, 2020, and December 31st, 2020, with a maximum credit of $5,000 per employee. For the first three quarters of 2021, law firms can claim up to 70% of qualified wages paid, with a maximum credit of $7,000 per employee per quarter.
Qualified Wages
Qualified wages refer to the wages that law firms paid to their employees during the eligible period. According to Dickinson Law Firm, qualified wages include:
- Hourly wages
- Salaries
- Commissions
- Tips
- Other forms of compensation
Eligible Employees
Not all employees are eligible for the ERTC. According to Ask Frost are eligible for the ERTC.
Claiming ERTC
Law firms must claim the ERTC on their quarterly federal employment tax returns, such as Form 941. According to AccessWire](https://www.accesswire.com/752074/Attorney-Employee-Retention-Tax-Credit-Refunds-for-Law-Firms), some law firms may be overpaying for ERTC services, with some paying up to 30% of their refund to companies providing these services. However, law firms can work with tax professionals or consulting firms, like [Disaster Loan Advisors, to maximize their ERTC refunds while minimizing their costs.
Examples of ERTC Claim
Here are some examples of how much a law firm can claim with ERTC:
- A law firm paid $75,000 in qualified wages to 10 eligible employees during the eligible period in 2020. The maximum credit they can claim is $25,000 ($5,000 per employee).
- A law firm paid $100,000 in qualified wages to 10 eligible employees during the first quarter of 2021. The maximum credit they can claim is $49,000 ($7,000 per employee).
- A law firm paid $200,000 in qualified wages to 20 eligible employees during the eligible period in 2020. The maximum credit they can claim is $100,000 ($5,000 per employee).
How Can ERTC Help Law Firms?
The ERTC can provide law firms with significant financial benefits during challenging times caused by the COVID-19 pandemic. Here are some ways that the ERTC can help law firms:
Financial Relief
According to Ask Frost, the ERTC can provide law firms with significant financial relief during the pandemic. The tax credit can help law firms reduce their payroll tax liability or even result in a refund from the IRS. This financial relief can help law firms retain their employees and maintain their operations during a challenging economic environment.
Retention of Employees
The ERTC can also help law firms retain their employees during the pandemic. According to Disaster Loan Advisors, the tax credit can provide law firms with an incentive to keep their employees on the payroll, even if their operations have been impacted by the pandemic. By retaining their employees, law firms can maintain their existing client relationships and be better positioned to take advantage of future opportunities when the economy recovers.
Lower Payroll Costs
The ERTC can help law firms lower their payroll costs during the pandemic. According to AccessWire, the tax credit can help law firms reduce their payroll tax liability, effectively lowering their payroll costs. By lowering their payroll costs, law firms can improve their cash flow and be better positioned to weather the economic impacts of the pandemic.
Consulting Services
Law firms can work with consulting firms or tax professionals to ensure they are maximizing their ERTC benefits. According to Dickinson Law Firm, law firms should analyze their situation on a case-by-case basis to determine if they are eligible for the ERTC. Consulting services like Disaster Loan Advisors can provide law firms with an eligibility analysis and help them claim their ERTC benefits. This can ensure that law firms can maximize their benefits while minimizing their costs.
Examples of ERTC Benefits
Here are some examples of how law firms can benefit from the ERTC:
- A law firm with 10 eligible employees can claim up to $50,000 in tax credits for qualified wages paid during the eligible period in 2020, reducing their payroll tax liability or resulting in a refund from the IRS.
- A law firm can retain its employees during the pandemic by taking advantage of the ERTC, even if their operations have been impacted by the pandemic.
- A law firm can lower its payroll costs by claiming the ERTC, improving their cash flow during a challenging economic environment.
Applying for ERTC: A Step-by-Step Guide for Law Firms
Applying for the ERTC can be a straightforward process for law firms. Here's a step-by-step guide on how to apply for the ERTC:
Step 1: Determine Eligibility
The first step in applying for the ERTC is to determine if your law firm is eligible for the tax credit. According to CBH, law firms can qualify as eligible employers if they were subject to government mandates, including court closures, restrictions, and delays. Law firms can also qualify if they experienced a partial suspension of operations or a significant decline in gross receipts.
Step 2: Calculate Qualified Wages
The next step is to calculate the amount of qualified wages paid during the eligible period. Qualified wages include hourly wages, salaries, commissions, tips, and other forms of compensation. According to Disaster Loan Advisors, law firms can claim up to 50% of qualified wages paid between March 12th, 2020, and December 31st, 2020, with a maximum credit of $5,000 per employee. For the first three quarters of 2021, law firms can claim up to 70% of qualified wages paid, with a maximum credit of $7,000 per employee per quarter.
Step 3: Claim ERTC on Form 941
Law firms must claim the ERTC on their quarterly federal employment tax returns, such as Form 941. According to CBH, law firms can claim the ERTC on the same form that they use to report their payroll taxes. Law firms can reduce their payroll tax liability or even receive a refund from the IRS if their ERTC exceeds their payroll tax liability.
Step 4: Consult Tax Professionals
Law firms can work with consulting firms or tax professionals to ensure they are maximizing their ERTC benefits. According to Ask Frost, tax professionals can help law firms determine their eligibility for the ERTC, calculate their qualified wages, and claim their tax credits on Form 941. Consulting services like Disaster Loan Advisors can provide law firms with an eligibility analysis and help them claim their ERTC benefits.
Step 5: Keep Accurate Records
Law firms should keep accurate records of their ERTC claims and supporting documentation, such as payroll records and tax returns. According to Disaster Loan Advisors, law firms should keep records for at least four years after the due date of the tax return or the date the tax was paid, whichever is later. Keeping accurate records can help law firms avoid audits or inquiries from the IRS.
Examples of ERTC Application
Here are some examples of how law firms can apply for the ERTC:
- A law firm determines that it is eligible for the ERTC due to government-issued restrictions during the pandemic. The firm calculates that it paid $100,000 in qualified wages during the first quarter of 2021 and files Form 941 to claim a credit of $70,000 ($7,000 per employee).
- A law firm consults with a tax professional to determine its eligibility for the ERTC and claim its tax credits on Form 941. The firm receives a refund from the IRS for its ERTC, reducing its payroll tax liability and improving its cash flow during a challenging economic environment.
Wrap Up
The ERTC can provide significant financial benefits to law firms during a challenging economic environment caused by the COVID-19 pandemic. By retaining their employees, lowering their payroll costs, and maximizing their tax credits, law firms can maintain their operations and be better positioned to take advantage of future opportunities when the economy recovers.
If you're interested in learning more about tax credits for law firms, be sure to check out our other great content on ertcguy.com. Our website offers a wealth of information on tax credits, accounting, and consulting services for law firms and other businesses.
Thank you for reading and we hope this article has provided valuable insights on the ERTC and how it can benefit law firms during the pandemic.
Q & A
Question: Who is eligible for the employee retention tax credit for law firms?
Answer: Law firms that experienced a suspension of business operations or a significant decline in gross receipts may be eligible.
Question: What is the maximum employee retention tax credit for law firms?
Answer: Law firms can claim up to $5,000 per employee for 2020 and up to $7,000 per quarter for the first three quarters of 2021.
Question: How can law firms claim the employee retention tax credit?
Answer: Law firms must claim the ERTC on their quarterly federal employment tax returns, such as Form 941.
Question: What are qualified wages for the employee retention tax credit?
Answer: Qualified wages include hourly wages, salaries, commissions, tips, and other forms of compensation.
Question: Who can law firms consult to maximize their employee retention tax credit?
Answer: Law firms can work with consulting firms or tax professionals to help them determine their eligibility and claim their tax credits.
Question: What if law firms have already received a Paycheck Protection Program loan?
Answer: Law firms can still claim tax credits through amended payroll tax returns due to partial shutdowns or declines in gross receipts during 2020 and 2021.
