The COVID-19 pandemic forced many businesses to cease operations due to government mandates and thus severely limited the opportunity to stay above water. In response, Congress passed programs as part of the CARES Act to provide financial assistance to companies struggling due to the pandemic. One of these programs was the Employee Retention Credit (ERC).
The ERC gives eligible employers payroll tax credits for wages and health insurance paid to employees during the pandemic. Yet, many businesses did not take advantage of the program due to confusion about qualifications. Since the IRS (Internal Revenue Service) issued guidance related to eligibility in 2021, the confusion around ERC qualifications has decreased, and business owners have become more aware of the tax credit. However, misconceptions about the ERC still remain and have made the filing process difficult to navigate without qualified assistance.
Outlined below, we debunk the top seven misconceptions related to the ERC.
Despite being highly beneficial for businesses, employees, and the economy, the ERC has unfortunately been painted in a negative light due to fraud. In the annual Dirty Dozen list, the IRS warns consumers about exploitative promoters and other third parties, sometimes called “ERC mills,” who use radio and internet ads to promote ERC refunds. The catch is that ERC mills often claim businesses are eligible for more than they are, leading to potential audits. Employing experienced tax and legal professionals can help business owners file a legitimate ERC claim through the CARES Act.
These schemes negatively impact everyone involved. Filing false claims can lead to credit repayment, interest and financial penalties, and criminal liability. Further, even if someone decides against filing a claim, the mere act of visiting fraudulent websites opens the door for identity theft.
At Sagemont Tax, we understand that the possible repercussions of filing a false claim—knowingly or unknowingly—are daunting and potentially life-altering. Don’t let this information deflect you from applying for and benefiting from the ERC. Mitigate any stresses related to filing and reap the benefits of the credit by consulting with qualified tax and legal professionals to determine ERC eligibility. Any business owner or manager interested in claiming the ERC, or reviewing a prior claim, should practice due diligence in researching and choosing a third-party ERC.
Like the ERC, the Paycheck Protection Program (PPP) was established by the CARES Act to prevent economic downfall during the pandemic and provide small businesses with funds to pay up to eight weeks of payroll costs. The most significant difference between the ERC and PPP CARES Act programs is that PPP loans must be repaid with interest—unless the borrower eventually qualifies for forgiveness—while ERC does not have to be repaid. Another difference is that PPP loans are available to businesses of all sizes, while the ERC is only available to employers with less than five-hundred employees.
Luckily, employers don’t have to choose between the PPP and the ERC. The Consolidated Appropriations Act of 2021 allows employers to claim ERC funds for any wages that were not added to the payroll costs reported for PPP loan forgiveness.
However, businesses need to avoid “double-dipping.” When designating wages as ERC wages after an employer has had a PPP loan forgiven, a qualified ERC advisor must take a thoughtful approach to ensure the client is not engaging in “double-dipping,” while concurrently deploying a strategy to optimize the ERC-qualified wages.
In 2023, the financial qualifications for ERC fund eligibility were lowered. The threshold for gross receipts dropped from 50% to 20% for 2021. Qualifying businesses that faced a 20% decline in revenue during the pandemic are eligible for the ERC funds.
Even without revenue decline, employers showing substantial proof of how their business was impacted by the COVID-19 pandemic and satisfying a gross receipts test mandatory for obtaining ERC funds may still qualify. If your organization suffered a full or partial suspension of business operations due to COVID-19 government executive orders, you may still qualify for ERC funds due to a business interruption, even if revenue went up during the periods for which you’re claiming. The full or partial suspension of operations is not a financial statement test, and therefore, a business is not required to have a revenue decline in gross receipts to prove the existence of a partial suspension of operations. For instance, many hospitals didn’t lose revenue but were forced to increase staffing due to the operational impact of the pandemic, despite adverse working conditions.
Some eligible employers who qualify for the ERC and other CARES Act financial programs may hesitate to apply for benefits. Some may feel it is unethical to apply if they did not experience a decline in revenue and would be depleting funds other businesses or taxpayers need if awarded the credit.
The ERC is a tax credit program funded by the U.S. government to provide relief to all eligible companies that were impacted by the COVID-19 pandemic. The ERC funds come from the U.S. Treasury, so by applying for the program, no single business is taking away funds that another business needs.
Some may think that, because the tax credit technically expired in September 2021, businesses can no longer apply for or receive the credit. However, qualified businesses can still amend their filings for the ERC until 2025. Business owners must file IRS Form 941-X, which is used to make corrections to originally filed Form 941s. Note that this can only be done up to three years after the initially filed payroll tax returns, but within that time frame, there is no limit to how many times you can file an amended form.
The IRS provides that, “For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.” So, 941-Xs for eligible quarters in 2020 must be submitted to the Internal Revenue Service by April 15, 2024. The ERC deadline to claim funds for eligible quarters in 2021 must be submitted by April 15, 2025.
Although Certified Public Accountants (CPAs) can file for ERC on behalf of your business, they may be unfamiliar with the laws and intricacies of the ERC and CARES Act, which can result in missing specific findings that make your business eligible for a higher ERC. CPAs have a thorough understanding of taxes, but ERC is much more complex as there are both financial and legal aspects to consider.
For legal advice regarding ERC, consulting a CPA would not provide any advantage for your business. Instead, you should get in touch with ERC experts with both tax and legal expertise, like Sagemont Tax, who are well-versed in rules and regulations related to ERC.
When you hear the term “small business,” you may immediately think of mom-and-pop stores or locally owned, unique coffee shops in your hometown. In reality, the scope of what qualifies as a small business is much larger.
Whether a business is considered a small business is based on the size standards established by the Small Business Administration (SBA). The size standards vary by industry and are based on either the number of employees or the average annual receipts of the business. For ERC purposes, only full-time W-2 employees from 2019 who worked at least 130 hours per month count. Note: the monthly average is used to calculate full-time employees rather than the total count.
For full-time employees, the original 2020 version of the ERC only allowed businesses with 100 or fewer full-time employees in 2019 to claim the credit. However, this was later expanded to include businesses with 500 or fewer full-time employees in 2019 for 2021.
So, employers with up to 100 full-time employees can claim the ERC for 2020 and 2021 qualified wages, and employers with up to 500 full-time employees can claim the ERC for 2021 qualified wages. These eligibility requirements are subject to change, and businesses should consult with an ERC expert to determine their eligibility for the ERC.
Consulting with experienced, qualified tax and legal professionals is the first step to determining ERC eligibility and filing a legitimate claim for the credit.
Expert ERC firms are led by certified public accountants and tax attorneys with extensive experience in the legal test related to the ERC. With an arsenal of professionals on hand, a qualified advisor can ensure that all eligibility criteria are met for each applicable period before submitting a claim for the credit. They will also provide a detailed, CPA-certified, audit-ready report to their clients detailing their eligibility and wages claimed. Additionally, they will advise employers to refrain from claiming or overclaiming the credit when they do not have a clear path to eligibility.
Our leading experts in ERC are just a quick visit, email, or call away. There is no commitment and no up-front fees for a review of eligibility. Please get in touch with us to get started or with any questions you may have about the Employee Retention Credit.