Best Practices for ERTC Documentation

September 21, 2023
Dayes Law Firm

If your business continued paying employees throughout the pandemic, the government provides a special tax credit called the Employee Retention Tax Credit (ERTC). The ERTC provides money your business can use for hiring, bills, advertising, and other expenses you may need to pay to stay afloat.

Keeping good ERTC documentation is important if you intend to claim this credit. Here is more about the documentation you’ll need, plus how to account for the credit in your books.

How Does the ERTC Work?

The ERTC program credits you for qualified wages paid to employees during the pandemic. If you had fewer than 500 employees in 2021, the IRS considers you a small employer, which means you can claim the credit for all employees whether they were actively working for you or not. If you have more than 500 employees, you can only claim the credit for those not providing services to you.

The employee limit is lower for 2020. If you had fewer than 100 employees in 2020, the IRS classifies you as a small employer. The IRS deems you a large employer if you had more employees than that.

If you qualify, you can claim a credit worth:

  • Up to $5,000 per worker for 2020
  • Up to $7,000 per worker per quarter for 2021

Documentation You Will Need to Claim the ERTC

You’ll need to have kept thorough documentation to claim the ERTC. Without this ERTC documentation, knowing how much your credit might be worth may be nearly impossible.

You can claim the credit by filling out Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. The documentation you’ll need to gather to complete this form includes:

  • Records of qualified wages you paid to employees in 2020 and 2021 (this also includes health insurance costs you paid for your workers)
  • Supporting documentation for wages paid, such as payroll reports and tax filings
  • Documentation showing which employees you retained for the period in which you’re claiming the credit
  • A copy of your Paycheck Protection Program (PPP) loan application, if applicable
  • Proof of a decline in gross receipts or closure due to a government order

Mistakes To Avoid

It’s too easy to make mistakes in your calculations if you haven’t kept good documentation. Watch out for these common mistakes:

  • Incorrectly classifying employees as full-time workers
  • Claiming ineligible wages
  • Making errors when calculating average annual compensation
  • Failing to account for your business’s gross receipts
  • Using the incorrect time frame for the credit you want to claim (for example, referring to documentation from 2020 if you want to claim the credit for 2021)

Accounting for the ERTC

In addition to the documentation needed to claim the ERTC, you must account for the ERTC in your financial records. You won’t find specific instructions for accounting for the ERTC from the Financial Accounting Standards Board (FASB). However, accountants recommend a few strategies to help account for the ERTC.

One strategy you can use is to report the ERTC with IAS 20. If you go this route, you’ll account for the ERTC as a grant related to income.

If you run a nonprofit, you can use ACS Subtopic 958-605. If you choose this option, you would present your credit as either a refund receivable or an unearned refund advance.

We’ll Help You Claim This Valuable Credit

Did your business keep adequate ERTC documentation for 2020 and 2021? If not, knowing how much credit you may qualify for can be tricky. At Dayes Law Firm, our attorneys will work with you to review your tax situation and help you understand whether you qualify for the ERTC.

To speak with us, call (866) 567-4510 today.