What Is the Employee Retention Credit?

The Employee Retention Credit, or ERC, is sometimes referred to as the Employee Retention Tax Credit (ERTC). This is a valuable tax credit offered to businesses and tax-exempt organizations during COVID.

This credit was designed to encourage employers to keep their workers on payroll, providing a significant financial incentive even during difficult economic times. While the ERC is no longer active, eligible employers can still claim this credit retroactively.

If you’re a business owner, Head of HR/People, or in a financial leadership role, the ERC could potentially provide valuable business tax relief. Understanding what it is, the eligibility requirements, and the application process is essential, especially given the increased scrutiny from the IRS (Internal Revenue Service) regarding fraudulent ERC claims.

What Should You Know About the ERC?

The ERC is a refundable tax credit, meaning that if your eligible credit amount exceeds your federal tax liability, the IRS will issue you a refund. It was initially introduced as part of the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, in 2020.

Subsequent legislation, including the Consolidated Appropriations Act of 2021, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act, expanded and then ultimately restricted the availability of the ERC. You can find a detailed breakdown of these changes on the IRS website.

Currently, the IRS has paused processing most ERC claims due to a wave of scams surrounding the credit. This underscores the importance of accurate and legitimate claims. Consulting with qualified tax professionals is highly recommended if your business is considering claiming the ERC.

Who Qualifies for ERC Eligibility?

The ERC wasn’t a universal tax credit. Eligibility rests on three primary scenarios:

Government-Mandated Shutdown

If your business operations were fully or partially suspended due to a COVID-19-related government order, you might have a strong case for ERC eligibility. This could include restrictions on travel, commerce, or group meetings that directly impact your ability to function.

Significant Decline in Gross Receipts

You’ll need to demonstrate that your business experienced a considerable decrease in your gross receipts, and it must be on a specific calendar quarter as compared to that same quarter in 2019.

The specific percentage decline that qualifies you for the ERC has changed throughout the program, so it’s essential to consult the IRS guidelines or a tax professional for the most up-to-date information.

Recovery Startup Business

If your business began operations after February 15, 2020, and meets certain average annual gross receipts thresholds, you might qualify for the ERC as a recovery startup business. This provision has specific details, so it’s best to verify directly that you’re an eligible employer with the IRS or a qualified advisor.

Employer Size Matters

All businesses can potentially claim the ERC. That means whether you’re a small business or a large corporation, you’re in the running.

However, the rules determining which wages qualify may differ depending on the average number of full-time employees you had during certain time periods. It’s essential to understand these distinctions for accurate claim calculation.

What To Know About Calculating the ERC

Not all wages you pay to employees will qualify for the ERC. Qualified wages generally include regular pay, some types of bonuses, and contributions to health insurance plans.

It’s important to remember that there’s a cap on the amount of qualified wages you can claim per employee per calendar quarter.

The ERC is a refundable tax credit. This means it directly reduces the amount of payroll taxes (specifically your share of Social Security taxes) you owe to the IRS. The percentage you can claim against qualified wages was adjusted throughout the ERC’s availability, so verifying the correct rate for your claim is important.

Let’s say your business experienced a temporary government-mandated shutdown during the first quarter of 2021. You identify $50,000 in qualified wages across your employees. If the applicable ERC percentage for that quarter is 70 percent, your potential ERC credit for those wages could be $35,000 ($50,000 x 0.7).

The IRS has extensive resources available online to assist businesses in understanding ERC eligibility and calculation rules.
The ERC interacts with other tax provisions, such as the Paycheck Protection Program (PPP). If you received PPP loan forgiveness, be sure to consult with a tax expert to ensure you’re not claiming the same wages for both the ERC and PPP forgiveness.

Given the rise in ERC-related scams, the IRS is closely scrutinizing claims. Working with a reputable tax professional can help ensure the accuracy of your claim and avoid any potential issues with the IRS.

What Is the ERC Claim Process?

If you think your business might be eligible for the ERC, here’s what you need to keep in mind regarding the claim process and deadlines:

The Right Form: Most employers will use Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to claim the ERC. This form allows you to retroactively amend previously filed quarterly payroll tax returns to include the credit.
Don’t Delay: There’s a deadline for retroactively claiming the ERC. Currently, you must file amended tax returns for eligible quarters by April 15, 2025. Missing this deadline could mean forfeiting potential tax relief for your business.
Potential Impact on Income Tax: In some cases, claiming the ERC might also require amending your business’s income tax returns for the relevant tax years. This is something to discuss with a tax advisor for the most accurate guidance on your specific situation.

What Is the Relationship Between ERC and PPP?

One point of confusion for many businesses is how the Employee Retention Credit interacts with PPP loans. You can receive both the ERC and a PPP loan. This change was made to expand the support available to businesses during the pandemic.

The key limitation is that you cannot use the same wages for both the ERC and PPP loan forgiveness. So, any wages paid with funds from a forgiven PPP loan won’t qualify for ERC calculations.

What Is the Importance of Accurate ERC Claims?

With the recent increase in fraudulent ERC claims, the IRS is taking a closer look. Here’s why accuracy is essential:

IRS Crackdown: Keep in mind that the IRS has put a moratorium on processing most new ERC claims due to the surge in scams. They are investigating suspicious claims and have even launched criminal investigations into promoters of aggressive ERC marketing schemes.
Avoid Penalties: Erroneous or inflated ERC claims could result in penalties, interest, and even potential legal issues for your business. Working with reputable tax professionals can help ensure that your claim is legitimate and correctly calculated.

The ERC was a valuable program, but understanding the eligibility rules and accurately filing claims is paramount. Partnering with qualified tax professionals can greatly streamline the process and safeguard your business from any potential IRS scrutiny.

Make Sure You’re Compliant With Mosey

The ERC might still offer valuable tax relief for your business. However, determining eligibility and accurately claiming the credit may be challenging for some businesses. Consulting with qualified tax professionals is highly recommended to ensure you maximize any potential benefits and stay clear of IRS issues.

For businesses dealing with constantly changing compliance requirements, automated solutions like Mosey can streamline business compliance and help identify potential opportunities as legislation is enacted. This allows you to focus on growing your business while staying on top of compliance requirements.

Schedule a demo with Mosey to learn how you can simplify your state compliance processes.