I was really proud of the work I had done on my clients’ ERTC applications. I was very careful to double check hours and wages, make sure that no other government or restricted funds were covering the same pay, and that all documentation was clear. Today, that served me very well (at least hopefully).

You see, the IRS checks the original quarterly Form 941 filed against the later 941X filed to apply for the credits, which makes sense.

The 941X has a number of lines in which to show the wages, but nowhere on the form does it have a place to list the number of employees you paid those wages on (pay attention, this is about to become very important.)

The original form 941, in Part 1, Line 1, asks the number of employees, citing a specific date, that being the 12th of the month in the last month of the quarter:

Well, for theaters and many arts organizations, you might have many employees for much or part of the quarter that were not still on the payroll as of the 12th of that month. This particular client had 29 employees that worked for them at some time during quarter, but only 6 in the payroll including June 12.

In reviewing their form, the IRS took the maximum for the quarter (70% of up to $10,000 per person, or $7,000), and multiplied it by the number of employees in the June 12 payroll (6), to get a maximum allowable amount of $42,000. Except, of course, that the total number of employees for the quarter was actually 29, and 70% of the total eligible wages was $60,942.04, which is the amount we had claimed and received. The IRS letter assumed we had made an 18K error. I knew we had not.

Today, I had to write them a letter explaining that “people who worked for ORGANIZATION during the quarter, and people who were on ORGANIZATION’s payroll on the 12th of the month” were always going to be vastly different numbers. I sent them the original 941 and the 941X and the payroll records and the calculation document I had created. And now I’m crossing my fingers, but I think they will realize it is a semantic issue, not a calculation one.

Try getting one of the ERTC scammers that popped up over the last several years to do THAT for you!