There is a lot of misinformation out there about the ERC. Below are some of the most commonly asked questions, answered!
The Employee Retention Credit, or ERC, is a stimulus program that was released with the CARES Act in March 2020 at the same time as the Paycheck Protection Program (PPP). In short, it is a refundable cash credit that was intended to incentivize businesses to retain and continue paying their employees through the COVID-19 pandemic. While virtually every small or medium business jumped at the PPP at the onset, many did not initially claim the ERC.
At first, companies were only allowed to choose either the PPP or the ERC, but not both. When the CARES Act was originally released in March 2020, the PPP was generally chosen over the ERC by most businesses for the following reasons:
1) The PPP was much easier to understand and compute. Businesses were fairly certain they’d be able to get a dollar-for-dollar benefit for the PPP, while the ERC only appeared to provide a benefit of 50 cents on the dollar, at most.
2) At the time, the PPP usually resulted in cash funding in April/May of 2020, while the ERC could take months to obtain.
In December 2020, the Consolidated Appropriations Act (CAA) changed the ERC rules and expanded eligibility dramatically, allowing small business owners access to the benefits under the ERC, even if they took PPP 1 or PPP 2!
Under the ERC, Uncle Sam rebates you for wages paid to each employee you retained during times your business was affected by COVID (provided you were eligible under 1 of 2 tests, discussed below). The total value of the rebate is 50% on up to $10,000 in qualified wages in 2020 – or $5,000 total per employee in 2020 – plus 70% on $10,000 in qualified wages per quarter for the first three quarters in 2021 – or $21,000 total per employee in 2021. This adds up to a huge amount of money – depending on periods of eligibility, up to $26,000 total per employee!
One more note: The PPP is governed by the Small Business Administration (SBA) and the ERC by the Internal Revenue Service (IRS). While there is overlap in similar concepts like aggregation of commonly controlled business and testing employee headcount, there are major differences between the specific application of those rules.
Fear not, we are well-equipped to guide your business through these nuances and help you claim the credit you are owed.
While both the PPP and ERC were created by the CARES Act, there are some notable differences: the PPP was structured as a forgivable loan through your local bank via the SBA; whereas the ERC is a tax credit claimed through the IRS via your payroll tax returns – it is not a forgivable loan; it is cash for you to do whatever you choose.
The PPP had a specific funding amount and PPP funds ran out; however, since ERC refunds are funded by the U.S. Treasury, these funds will not run out (absent legislative law changes, which are doubtful with the current split Congress). You just have to claim your credit prior to the end of the 3-year lookback period. Finally, the PPP didn’t have any U.S. Federal income tax implications, whereas the ERC requires an adjustment to your wage deduction / taxable income for the year(s) claimed.
Yes! Before the CAA was passed in December 2020, businesses could not claim the ERC if they had accepted a PPP loan. With the updated CAA, businesses are eligible in 2021 even if they claimed a PPP loan.
However, it is important to note that in retroactively allowing PPP borrowers to claim the ERC, Congress included a “no double-dipping” rule that prevents businesses from using the same payroll costs to obtain PPP loan forgiveness and the ERC. This makes sense because employers should not receive a tax credit based on an amount paid for wages with proceeds from a forgiven loan.
No! It’s a cash refund from the IRS, not a loan, for you to spend however you’d like, including distributions out to owners.
Sagemont Tax brings a leadership team of former “Big 4” CPAs and top consulting and law firm professionals who are credentialed and experienced, with decades of knowledge in both advising taxpayers on complex tax transactions and tax positions, as well as representing clients in front of the IRS.
With Sagemont Tax, you will receive premier ERC services from start to finish, including filing your ERC claim with the IRS and providing a CPA Certified, audit-ready report to ensure peace of mind even after your credit is received. Sagemont Tax also assists clients in tracking their refunds with the IRS and troubleshooting any related issues.
This is not a lending program – ERC tax refunds are issued by the U.S. Treasury. Therefore, all eligible employers will receive the funds they are qualified for so long as they file their claim within the 3-year lookback period.
ERC “Version 1” went live in March 2020 but was mostly ignored due to the focus on PPP. However, in December 2020, the Government updated the law with the release of ERC “Version 2” through the CAA. Under Version 2, employers were both retroactively and prospectively allowed to take both ERC and PPP (Rounds 1 and 2). Version 2 also extended the credit into Q1, Q2, and Q3 of 2021 and increased the field of eligible employers by allowing companies with up to 500 employees to take the credit (up from 100 for 2020). In short, it was a huge expansion of eligibility that opened up a significant opportunity for hundreds of thousands of businesses in the United States.
A business is eligible if they meet one of two tests. Only one test is required and it’s possible to qualify under one test for one period, and another test for a different period.
The first test is a quantitative test that was developed as an objective measure of whether COVID-19 impacted a company’s ability to generate revenues comparable to pre-COVID levels. This test is referred to as the “Substantial Decline in Gross Receipts” test or SDGR. This test looks to compare quarterly periods in 2020 and 2021 to the same quarterly period in 2019. The relevant percentage decline is 50% in 2020 and 20% in 2021. For example, if an employer had $49,000 of gross receipts in Q2 2020 compared to $100,000 of gross receipts in Q2 2019, this 51% decline would qualify the employer under the SDGR test. Similarly, an employer with $79,000 of gross receipts in Q1 2021 compared to $100,000 gross receipts in Q1 2019, would also meet the SDGR test for Q1 2021 (i.e., due to a 21% decline). Note that in nearly all cases, if a business qualifies under this test for a quarter, it will qualify automatically for the following quarter (under the alternative quarter rules), provided at least 6 months of eligibility. The alternative quarter rules can be quite complicated, and we work with our clients closely to help evaluate eligibility.
Even if a company doesn’t qualify under the SDGR test, it can still qualify if it meets the full or partial suspension of operations test or FPSO. The FPSO test applies for the periods of time when the operations of a business were shut down or subject to certain restrictions/modifications (such as reductions in operating hours and capacity limit restrictions) due to a COVID governmental order. Common examples of a partial suspension are: (i) a restaurant that was forced to move to take-out or delivery only or reduce their capacity limit with dine-in service due to social distancing requirements; (ii) a gym or fitness center that was required to move to appointment-only, reduce capacity, or close their day-care facilities; or (iii) a doctor’s office that does more than a nominal amount of elective procedures. A lesser-known partial suspension can occur when a business is affected due to supplier-related issues. For example, a business that cannot obtain materials or supplies from vendors that were shut down by COVID-19 governmental orders can also translate into the first business being treated as partially suspended. Finally, there are complex rules that look at businesses with multiple locations, segments, or divisions and can cause the entire business to be treated as partially suspended, even if only one of the locations, segments, or divisions were impacted.
Sagemont Tax has experience with all these scenarios and has helped hundreds of Clients through the complicated tax laws to maximize their ERC – typically 40% more than most CPAs, bookkeepers, and payroll providers!
Eligible employers are small businesses in the U.S. that carry on a trade or business during the calendar year for 2020 and/or 2021 and had 100 or fewer full-time W-2 employees in 2019 to qualify for the 2020 credit, or 500 or fewer full-time W-2 employees in 2019 to qualify for the 2021 credit. Note: you can have an unlimited number of part-time employees + 1099 employees and still qualify. Even if you exceed such thresholds, you may still qualify, but would be subject to the more restrictive large employer rules.
Eligible employers also include tax-exempt organizations that meet either the SDGR or FPSO tests.
Qualified wages are compensation provided to employees, such as salaries and bonuses, during an eligible period after March 12, 2020, inclusive of health plan expenses.
Yes. IRS Notice 2021-20 provides that an employer receiving an ERC refund should not include the credit in gross income for federal income tax purposes; however, under rules similar to IRC Section 280C (which also applies to other tax credits, such as R&D credits), such employer should reduce their wage expense by such amount in 2020 and/or 2021, as applicable.
Sagemont Tax is one of the only ERC advisory firms in the U.S. to have CPAs from the largest tax firms in the world under the same roof as attorneys from the largest law firms in the world collaborating to simultaneously analyze their client’s ERC positions and stand behind them.
Sagemont Tax’s comprehensive service offering includes the preparation of a detailed “Eligibility Report,” including a detailed narrative report that both analyzes and documents our clients’ ERC claims according to the IRS’ stringent documentation requirements. The Report is often accompanied by a third-party legal memorandum or opinion for “partial suspension” candidates. Sagemont Tax also agrees to provide support to our clients in the rare case of an audit.
Sagemont Tax will provide you with full ERC services, including filing and claiming your ERC refund from the IRS.
Through our process, we collect qualitative and quantitative data to evaluate your eligibility and then perform detailed and complex computations to determine your ERC. Via this sophisticated analysis and reporting, we are able to maximize our clients’ ERC by carefully selecting how certain wages are treated for PPP versus ERC purposes at the employee level as well as understanding the nuances of a complex tax code.
For all of our clients, we deliver a +25-page report documenting your eligibility as well as the results from our proprietary Sagemont Tax model that supports the numbers used to claim your credit. We then help coordinate the preparation of any amended payroll tax returns (e.g., Form 941-X) and help you file your ERC claim with the IRS. After you file, we help you track the refund through its processing lifecycle with the IRS through our proprietary IRS tracking software.
The challenge with CPAs is that the ERC is taken on your payroll returns and not through your income tax returns, which is what most CPAs handle. Thus, the vast majority of the time, CPAs are not very well versed in the +150 pages of ERC tax law, which means you may get less than you should! Additionally, payroll providers like ADP certainly aren’t tax experts – choosing them to do your ERC is like choosing a dentist to fix your foot.
In 2020, we saw a gap in the market that existed between income tax CPAs and payroll providers, where neither was well equipped to handle ERC work. Because most CPAs handling income tax are not well versed in payroll taxes, and frankly are already overextended with income tax preparation, they simply haven’t had the time and resources to develop the sub-specialty in ERCs. If you are just hearing of the ERC now from us, this is likely further evidence of that fact. Additionally, while the decline in gross receipts test is an objective accounting analysis, CPAs typically aren’t equipped to analyze the partial suspension of operations test as this is a legal analysis.
Payroll providers (e.g., ADP, Paychex, QuickBooks, Gusto, etc.) will submit an ERC claim for you, but will not provide any assistance in determining eligibility and qualified wages. In most cases, they require employers to sign waivers of liability so that the payroll provider cannot be held liable for errors, omissions, or overstatements of ERC claims. Choosing this option may create an immense amount of risk of penalties and other punitive actions from the IRS.
The term “ERC mill” is now commonly used to describe the countless ERC service providers the IRS is alluding to in their recent warning. The most common criticism of these “firms” is that they are largely comprised of non-credentialed sales and marketing professionals purporting to be “ERC experts” or “consultants” and pushing tenuous, high-risk eligibility positions, often solely reliant on CDC/OSHA guidance and/or supply chain disruptions in an effort to universally qualify all businesses for the ERC.
A few common traits typical of ERC mills are as follows:
No CPA Ownership or Accounting Management. They are rarely founded, owned, and/or managed by tax, accounting, payroll, or legal professionals. Rather, most of them are owned and operated by “serial entrepreneurs” with little to no experience in the specialized tax or accounting services industry.
Outsourced Tax, Accounting & Legal Service Functions. ERC mills often have the majority of their “workforce” (most of which are independent contractors) focused on sales, marketing, and business development efforts. While most of the larger ERC mills may have hired a token CPA or lawyer in-house, most rely heavily on third-party accountants and lawyers to perform the tax, accounting, and/or legal work required in connection with the ERC. Hence, they in effect operate as a sales and marketing organization, with all actual technical work outsourced to an unrelated and independently liable party.
Overtly Aggressive Marketing Tactics on Eligibility. ERC Mills often perpetuate aggressive marketing campaigns through various digital channels to entice well-meaning business owners into their grip. They dangle the prospect of a $26,000 per employee credit and assure a high likelihood of eligibility for all businesses. Their eligibility positions are often based on obscure supply chain disruptions and/or rely on non-qualifying or outdated Federal guidance issued by the CDC and OSHA. These are considered weak positions in the industry and have a lower likelihood of withstanding IRS scrutiny.
Significant Contract Disclaimers to Shift Liability. Well aware of the fact that they lack sufficient credentials and experience to provide bona fide tax advice, most ERC mills include significant disclaimers and waivers of liability within their service agreements. These disclaimers often indicate that the “services provided” are not tax, accounting, or legal advice.
ERC “services” are inherently tax and accounting services, grounded in Internal Revenue Code, IRS Notices, and a complex accounting exercise pitting PPP wages against ERC-eligible wages. The good-guy firms know that it’s not enough to just “get” ERC refunds for their clients, it’s equally about ensuring they’ll be able to “keep” such refunds.
Sagemont Tax’s executive leadership team is comprised of multiple CPAs and/or attorneys with big firm experience (Big Four, Big Law, and Top 25 global consulting firms), and maintains that ERC services should indisputably be provided by a firm comprised of experienced, credentialed, and licensed tax, accounting, and legal professionals that are supported by a sales and marketing function, not a firm of sales and marketing professionals that are supported (usually externally) by tax and accounting professionals.
Currently, the IRS is not providing any estimates related to the timing of ERC receipt. However, they have indicated that there are several million paper payroll tax returns in the queue with the IRS. We are generally seeing credits that are under $200k per quarter being processed in 2-4 months and credits larger than $200k per quarter taking anywhere from 8-12 months.
Click here to answer the few questions. Then we’ll give you a quick call to confirm your info and help gauge your eligibility.
It’s really that simple to get started.
After our call, we’ll send you an engagement letter to review and sign to get started. After it’s returned, we’ll gather the data needed and that’s when we really get to work – it generally takes 2-4 weeks to complete our work for your IRS submission once we receive all of the necessary documentation. We then file a claim on your behalf with the IRS and send you back a complete Client Package with all of the work papers and information for your recordkeeping.
After that, you wait for your check to come in the mail from the U.S. Treasury!