Calculating Applicable Qualifying Wages & Health Benefit Costs of the Employee Retention Credit
Employee Retention Credit (ERC) Overview
The IRS is urging employers to take advantage of the extended ERC, designed to make it easier for businesses that, despite challenges posed by COVID-19, choose to keep their employees on the payroll.
The Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted December 27, 2020, made a number of changes to the employee retention tax credits previously made available under the Coronavirus Aid, Relief, and Economic Security Act, including modifying and extending the ERC through December 31, 2021, as part of the American Rescue Plan Act of 2021.
Watch this archived BKD Thoughtware® webinar to gain additional clarification on the extension and expansion of the ERC, compare 2020 and 2021 differences, and review the qualification criteria.
Application of Determining Eligibility & Calculating Credit
BKD has worked with many healthcare organizations to help identify the tax credit opportunity through calculating applicable qualifying wages and certain health benefit costs. We use a three-phase approach when working with our clients in obtaining the sufficient documentation for claiming the ERC. The phases are centered around identifying eligibility of the credit and estimating a potential benefit, conducting detailed calculations resulting in the total credit opportunity, and assisting with filing appropriate tax forms to receive the credit. All three phases are summarized below:
- Phase I – Feasibility Analysis: The focus of activity for Phase I is twofold: (1) analyze the specific position as a qualifying taxpayer under applicable law and complete research identifying relevant dates for which that status exists; and (2) prepare a high‐level financial benefit analysis related to the credit. Using applicable date ranges, wages paid, and available change in work effort data, we generate a high‐level estimate of the potential credit value to assist in understanding the general magnitude of the ERC.
- Phase II – Data Gathering & Computations: The Phase II workstream focuses on completing a detailed analysis of the factors that would allow for the filing of the credit. Specifically, this process starts with identifying all wages for the eligible employer period for identified providers. From there, steps are taken to identify and isolate the wages that qualify for the credit. The final step is a calculation of the credit itself. Our procedures to complete Phase II include:
- Identification of the Provider Pool: Determine the employed providers who could potentially qualify for the ERC.
- Identification of Nonworked Time: Developing and documenting a methodology to identify compensated time paid to the provider pool not worked because of COVID‐19-related restrictions imposed by applicable governmental orders (“nonworked” time).
- Identification of Qualifying Wages: Based on documented nonworked time and the use of corresponding payroll reports and detailed compensation calculations, we assist management in identifying qualifying wages earned during the defined time period. In addition, we assist management in developing and documenting a methodology for allocating total identified compensation to the “nonworked” hours identified above. Finally, we prepare a calculation of allocated wages based on the methodology approved by management.
- Exception Analysis: We complete a secondary analysis to assess providers more qualitatively for whom the general methodology does not yield the anticipated benefit. This process assists in “completeness” with respect to the overall analysis.
- Phase III – Tax Documentation & Filing: Phase III efforts are to offer assistance in accumulating the necessary documentation to claim the ERC on the client’s relevant payroll forms.
Interpreting the guidance as outlined in Notice 2021-20 and the subsequent calculation of qualifying wages and certain health benefit costs are complex. It is best to have these discussions with your BKD Trusted Advisor™. To keep up to date with the latest insights on the ERC and other COVID-19-related content, visit our COVID-19 Tax & Accounting Resource Center.