Everybody keeps saying we’re slowly leaving the pandemic behind – and for businesses, that means that pandemic tax relief is disappearing, too.
But can you still qualify for one of the most popular of the Covid-related federal breaks: the Employee Retention Credit (ERC)?
Here’s the deal: you have likely heard from friends or heard aggressive marketing campaigns that are promising the moon. BELIEVE ME when I tell you how the tax professional community has been viewing these companies – it isn’t kindly.
And now Congress and the IRS are gathering themselves to bring down the hammer on overly-aggressive claims in this area.
So today I want to separate truth from hype. But if you want to talk more about it one-on-one, let’s get something on the schedule:
But let’s dive in, shall we?
Can Businesses Still Get the Employee Retention Credit?
“You must pay taxes. But there’s no law that says you gotta leave a tip.” – Ad for Morgan Stanley
The Employee Retention Credit (ERC) is gone now, but it might be worth the trouble to retroactively file certain quarterly tax returns and try to get money back. Here’s what you should think about.
Running the numbers
The ERC was designed to help employers like you keep employees on the payroll during the tough times of the pandemic. The credit was based on qualifying wages paid to employees and was quarterly-based relief for 2020 and most of 2021.
Generally, to qualify a company had to experience a significant decline in gross receipts, shut down on government orders, or have suffered supply chain disruptions. For tax year 2020, you qualified in any quarter in which your gross receipts were less than half of those in the same quarter in 2019 (with some additional details). For 2021, you could claim the ERC in any quarter in which gross receipts were less than 80% of those in the same quarter in 2019 (or 2020 if your company wasn’t old enough). (Figuring your gross receipts isn’t as simple as just looking back through your books. You may qualify even if you don’t think so at first glance. Reach out to us.) Slightly different versions of the ERC are available depending on your company size.
You calculate the amount of ERC using the payroll for full-time employees (and, with some additional math, part-timers, too). Qualified wages were generally gross wages plus employer health insurance costs.
The maximum credit was $5,000 per employee for all of 2020 and $7,000 per quarter per employee for 2021. If you qualified, you could (and still can) claim the ERC for qualified wages you paid in all four quarters of 2020 and in the first three quarters of 2021.
“Recovery Startup Businesses” that opened after Feb. 15, 2020, and that had annual gross receipts of less than a million bucks could also claim wages for the last quarter of 2021. The recovery startup ERC limit was 50 grand per quarter; the credit was equal to 70% of qualified wages paid to employees in each quarter.
Employee Retention Credit Re-filing
You can still amend the IRS Form 941 for the quarters where you now think you qualified. To amend, you need to file Form 941X.
Each of your quarterly 941s is considered filed by Tax Day the following April. You have three years from these filing dates to amend previous filings to try for the ERC: Tax Day in April 2024 or April 2025 depending on whether you want to apply for the credit for 2020 or 2021.
You’ll need documentation to prove your decline in gross receipts or to prove that you were subject to a government-ordered pandemic shutdown. Undocumented claims about supply chain disruptions won’t help you get an ERC.
Step right up
The ERC changed frequently and has confused a lot of people. For instance, the American Rescue Plan extended the ERC to the end of 2021, although the Infrastructure Bill passed in November 2021 ended the ERC retroactively on Sept. 30, 2021 – but not for Recovery Startup Businesses. Got all that?
Some other points of confusion include…
- You may have also heard that you can’t get the ERC if you got a Paycheck Protection Loan (PPP). Untrue: Initially, you could not claim the ERC if you also got a PPP loan that was later forgiven. Lawmakers later relaxed that rule – but you still cannot use the same wages to calculate both the ERC and a PPP loan.
- Your business didn’t have to suffer both a reduction in gross receipts and a partial disruption due to a government-ordered shutdown.
- You can’t double dip on tax benefits for the same biz cost. If you previously claimed a deduction for employee wages and now you decide you want the ERC instead, you have to go back and amend your return to remove the wage deduction.
I heard a guy on the radio tell me he could get me thousands back for the ERC overnight …
Boutique ERC mills have cropped up lately, promising the moon for a cut of your easy credit money. Except:
- Reputable tax pros do not take a cut of a refund or credit.
- The IRS got a lot of money recently for better enforcement – and going after shady claims for tax credits tops their to-do list.
- These mills will likely be long shuttered if you have to defend yourself in an audit. Please, avoid.
While I want to equip you with tools and data to take advantage of those tax-reducing deductions like the Employee Retention Credit as long as you can, I also want you to understand the situation fully and have someone on your team that you trust to give it to you straight. That’s one thing you can depend on when you come to me. And I’m happy to help…
Helping your business,
Emelia Mensa, CPA