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The law doesn’t take a break. However, the COVID-19 pandemic forced many law firms and other legal businesses to considerably pare down their operations and implement remote work policies.
Instead of focusing on client acquisition and retention, realization and referral rates and case win/law ratio, law firms, legal consultancies, expert witness service providers and similar businesses encountered case backlogs and a decrease in both billable hours and revenue due to a lull in demand. Virtual proceedings became more commonplace, requiring these employers to shift to a different strategy for client communication that necessitated more advanced technology.
One claim legal businesses don’t want to miss out on is the Employee Retention Credit (ERC). A payroll tax credit available through the Coronavirus Aid, Relief and Economic Security Act (CARES Act), the ERC was enacted to encourage businesses to keep their employees on the payroll during the pandemic.
Although the Employee Retention Tax Credit expired in September 2021, eligible legal businesses still have time to file paperwork and retroactively receive claims for the ERC in 2023. To do so, they must file a Form 941-X for relevant quarters. For all four quarters in 2020, the deadline to apply is April 15, 2024. For all quarters in 2021, the deadline is April 15, 2025.
For how much of a refund can eligible employers receive through the Employee Retention Credit? For 2020, the ERC is a credit against certain payroll taxes of 50 percent of the wages paid — up to $10k per employee — from March 12 – December 31, 2020 (capped at $5k per employee). For 2021, the ERC is a quarterly tax credit of 70 percent of the first $10,000 in wages per employee in each quarter of 2021 from January to September 2021 (capped at $7K per employee per quarter).
Example: Wisconsin, March 24, 2020 – Governor Evers signed Executive Order #12 which directs all individuals present in the State of Wisconsin to stay at home or at their place of residence, except for specific outlined exceptions. All non-essential businesses and operations are required to cease, except for Minimum Basic operations, which are defined as the minimum necessary activities to maintain the value of the business’s inventory, preserve the condition of the business’s physical plant and equipment, ensure security, process payroll and employee benefits, and other related functions.
Essential Businesses and Operations are allowed to continue operations but must observe Social Distancing Requirements and, to the maximum extent possible, use technology to avoid meeting in person. Essential Businesses and Operations are defined according to the federal CISA guidance as well as additional businesses including grocery and medicine stores, child care services, and gas stations, among others.
Find More Government Orders Specific to Your State on Our Insights Page
Check out these FAQs to learn more about ERC eligibility requirements and how to apply for the tax credit:
How Do I Know if My Legal Business is Eligible for the ERC?
You may be eligible for the ERC if your business operations were fully or partially suspended by governmental COVID-19 orders, thereby limiting commerce, travel or group meetings. Your business also might be eligible if it experienced a significant decline in gross receipts during 2020 or within the first three quarters of 2021. New startup businesses that began operations after February 15, 2020, may also qualify, regardless of revenue.
There are two main ways to be eligible for stimulus refunds:
- If your business matches the required decline in revenue within any quarter of 2020 or 2021.
- If you have W-2 employees.
What Exactly Is “a Significant Decline in Gross Receipts” Under the Employee Retention Credit Program?
The answer to this question varies from 2020 to 2021. An employer had a significant decline in gross receipts in 2020 during the first calendar quarter if its gross receipts for that quarter were less than 50 percent of those for the same calendar quarter in 2019. An employer had a significant decline in gross receipts in 2021 during the first calendar quarter for its gross receipts for that quarter if they were less than 80 percent of those for the same calendar quarter in 2019.
What Advantages Does the ERC Offer Businesses in the Legal Industry?
By utilizing funds received through the Employee Retention Credit, legal businesses have a better opportunity to better weather economic downturns and position themselves for long-term success. Similarly, legal businesses that prioritize employee retention during difficult economic periods can enhance their reputation, attracting new clients and top talent and contributing to business growth.
Is the Employee Retention Credit the Same as the Paycheck Protection Program (PPP)?
No. Although both programs were developed to assist businesses struggling financially due to the COVID-19 pandemic, the PPP was a forgivable loan that provided small businesses with funds to pay up to eight weeks of payroll costs, including benefits, along with interest on mortgages, rent and utilities. The ERC is a refundable and non-refundable credit that eligible businesses can claim on qualified wages, including some health insurance costs, paid to employees.
How Do I Know Which COVID-19 Governmental Orders Were Enacted in the State Where My Legal Business is Located?
We have a list of state-specific COVID-19 orders on the Insights page of our website. Just click on your state to see the applicable orders and restrictions.
How Do I Apply for the Employee Retention Credit?
Business in the legal industry must first determine their eligibility, starting by ensuring they meet IRS qualifications. To retroactively claim the ERC, amend previously submitted Forms 941 by filing and submitting Form 941-X for each qualifying quarter.
Filing for the ERC isn’t the easiest process. Fortunately, the talented team here at StenTam can guide you through it to ensure you receive the maximum credit you’re owed. If you need help calculating your Employee Retention Credit or filing the necessary forms to claim it, we can help — contact us today!
Qualifying orders (From IRS)
What kind of government orders qualify my business or organization for the ERC? (added July 28, 2023)
To qualify for ERC, you need to have been subject to a qualifying government order related to COVID-19 that caused a full or partial suspension of your trade or business operations. The government order may be at the local, state, or federal level.
Examples of governmental orders:
- An order from the city’s mayor stating that all non-essential businesses must close for a specified time period;
- A state’s emergency proclamation that residents must shelter in place for a specified period, except for essential workers;
- An order from a local official imposing a curfew on residents that impacts the operating hours of your trade or business for a specified time period;
- An order from a local health department mandating a workplace closure for cleaning and disinfecting.
Can I rely on a recommendation, bulletin or statement issued by a government authority to qualify for ERC? (added July 28, 2023)
No. To qualify for the ERC, you must have been subject to a government order that fully or partially suspended your trade or business.
Recommendations or statements encouraging you to take certain actions are not orders.
If you use a third party to calculate or claim your ERC, you should ask them to give you a copy of the government orders – not a generic narrative about an order. Read the order carefully and make sure it applied to your business or organization.
Is being subject to a government order enough to make me eligible for ERC? (added July 28, 2023)
No. You need to demonstrate that the government order was related to COVID-19 and that it resulted in your trade or business being fully or partially suspended.
What does it mean to be fully or partially suspended? (added July 28, 2023)
Whether your business or organization was fully or partially suspended depends on your specific situation. For examples, see Notice 2021-20, Part III, Section D.
Some examples of who doesn’t qualify under this eligibility factor:
- If all your employees were able to telework during the pandemic and your business continued to operate, your business wasn’t suspended.
- If your customers were affected by a stay-at-home order, but no orders applied to your business operations, you weren’t suspended.
- If you voluntarily closed your business or reduced hours of operation, you weren’t ordered to suspend.
You could still qualify for ERC based on a decline in gross receipts even if you don’t qualify under suspension of operations due to government order.
Was my business or organization fully or partially suspended if I had a supply chain issue? (added July 28, 2023)
A supply chain issue, by itself, does not qualify you for the ERC.
The IRS provided a narrow, limited exception if an employer was not fully or partially suspended but their supplier was. However, it applied only when the employer absolutely could not operate without the supplier’s product and the supplier was fully or partially suspended themselves.
In addition to having the supplier’s governmental order, you will need to show that:
- The government order caused the supplier to suspend operations,
- You couldn’t obtain the supplier’s goods or materials elsewhere (regardless of cost), and
- It caused a full or partial suspension of your business operations.
Client Case Study
Small, family-owned businesses were strongly impacted by the pandemic and the accompanying government-mandated shutdowns. A Pennsylvania-based automotive service provider struggled as these shutdowns made it more difficult to keep their...Read More
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