The Employee Retention Credit (ERC) is a refundable payroll tax credit for employers that kept workers employed during COVID-19 pandemic while suffering significant gross receipt declines or being suspended under a government mandate. Eligible employers that haven’t yet claimed it might still be able to do so by filing amended payroll returns for tax years 2020 and 2021.
It is very likely that your business or non-profit organization has been contacted numerous times via emails, letters, text messages, TV commercials, and phone calls notifying you qualify for a credit of up to $26,000 per employee. Some third-party ERC processing companies or “experts” are promising that they can get businesses a refund without knowing anything about the employer’s situation. When businesses or non-profit organizations respond, these ERC “experts” are filing many claims with an extremely liberal and aggressive interpretation of eligibility for — and computation of — the credit.
Businesses and non-profit organizations should be wary of these advertised schemes as it could come back to bite them severely.
Congress extended the time in which the IRS could potentially audit businesses that claimed the Employee Retention Credit from three to five years in certain quarters. If the IRS finds that a business improperly claimed the credit for a period in which it did not qualify, the business or non-profit organization could be looking at major financial implications in the aftermath of the audit. The business or non-profit organization is responsible for information submitted on their tax returns, not the ERC processing companies. There are serious tax penalties for knowingly filing fraudulent tax returns.
What Are Some Warning Signs?
- Solicitations making promises that you qualify without requesting financial statements or payroll information.
- Eligibility determinations without evaluating number of employees or commonly controlled businesses.
- Offers to file when your business does not have any payroll.
- Refunds that exceed your payroll
- Contingent fees based upon a percentage of the credit. This provides an incentive to inflate the actual credit amounts and potentially disregard wages that don’t qualify for the credit.
- No mention to business that wage deductions claimed on the companies’ federal income tax returns must be reduced by the amount of the credit. This will result in an increase in income tax for businesses.
How Can My Business or Organization Qualify for ERC?
The ERC is a refundable tax credit designed for businesses that:
- Had a full or partial suspension of operations under a government mandate during 2020 or the first three quarters of 2021.
- Had significant declines in gross receipts from March 13, 2020, to September 30, 2021.
- Qualified as a recovery start up business for the third or fourth quarters of 2021.
Employee Retention Credit Limits
If it turns out the business qualifies for ERC in 2020, they would be able to claim a max of $10,000 in qualified wages per employee from all periods in which they qualify. This means that if an employer has $15,000 of qualified wages for a single employee from all qualifying periods of 2020, the credit will still only be calculated using $10,000 since that is the limit for the entire year. Maximum credit per employee is $5,000 in 2020.
For 2021 however, the limit on qualified wages is $10,000 per employee for each quarter the business qualifies for. If the employer qualifies for two quarters of 2021 and they have an employee with at least $10,000 of qualified wages from each quarter, they will receive the full credit from each quarter. Maximum credit per employee is $7,000 per quarter in 2021, eligibility is only for three quarters in 2021.
As a reminder, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021. Eligible employers cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program (PPP) loan forgiveness or that were used to claim certain other tax credits.
Please remember to exercise caution when working with companies that are not familiar with your business or non-profit organization. They may not have your best interest in mind. If you didn’t claim the ERC and believe you’re eligible, please contact us. Wegner CPAs can advise you on how to proceed.
Learn more in this article about IRS processing times and strategies to enhance your ERC credit.