The Employee Retention Credit (ERC) is a tax credit that was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. The goal of the ERC was to encourage and incentivize employers to keep their employees on payroll throughout the COVID-19 pandemic, and in the months to follow.
Over the past couple of years, the ERC has been extended and adjusted to allow small businesses and startups to take advantage of the significant tax credit available to them. But how to go about claiming this credit can be more complicated than you might expect, making it one of the most common small business tax questions.
How does the Employee Retention Credit work?
The ERC offers qualified businesses a refundable tax credit that helps offset the high cost of keeping their full-time workers on staff as the pandemic upended businesses across every industry. While the ERC was amended several times during the two years it was actively available, ultimately, the credit is worth up to $26,000 per employee.
To be eligible for the credit in 2020, employers must have conducted regular business activities from March 13, 2020, through December 31, 2020, and experienced a major business interruption or large decline in sales and earnings. That credit is worth up to $5,000 per employee.
In 2021, the credit was available for businesses that conducted regular activities and experienced a decline in sales and revenues in any quarter from January 1, 2021, to September 30, 2021. That credit is worth up to $21,000 per employee.
The exact credit a small business can qualify for also depends on how many full-time employees they had, whether those employees worked or didn’t work, and what other credits you claimed during that same time period. For example, the ERC can be claimed if you received a Payroll Protection Program loan, but not if you also recieved a Work Opportunity Tax Credit.
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A frequently asked small business tax question is whether the credit can be applied retroactively, since the ERC expired in September 2021. The answer is yes.
Employers can claim the credit retroactively for up to three years after they filed the tax return this credit would be applied to, or two years after they paid that year’s tax bill — whichever is later. That means businesses can claim 2020’s credit until April 15, 2024, and 2021’s credit until April 15, 2025.
To do so, businesses should use Form 941X, which is an adjusted return form, to correct their 2020 or 2021 tax return and claim the credit.
Today, “ERC mills” are pushing small businesses to apply for the ERC — even if they don’t fully qualify
Have you received an email from an “ERC Specialist” claiming you’ve missed out on a little-known payroll credit, worth up to $26,000 per employee? Then you’ve likely been contacted by an ERC mill.
On October 2022, in response to the growing number of third party “ERC Specialists,” the IRS issued a strong warning against trusting any advertisements or direct solicitations that promised a mega payout. According to the IRS, these firms aren’t out to help you save money— they see the ERC as an opportunity to profit off the tax benefits created for small businesses.
Despite their professional appearance, many ERC agencies are made of marketers and get-rich-quick entrepreneurs who look for ways to bend the rules and help small businesses claim tax credits they aren’t fully eligible for. While they claim to be tax experts ready to assist with small business tax questions, they’re usually operated without a Certified Public Accountant (CPA), Enrolled Agent (EA) or tax professional on staff, and they don’t have tax or legal experience to back up their claims.
These third party agencies also often charge a large upfront fee to conduct research and help you file your amended tax return to claim the credit. But they don’t inform business owners that claiming the credit also reduces the amount of wage deductions you can take for those years. As a result, some businesses end up paying ERC firms more than the value of the credit.
In some cases, ERC firms have even been known to misadvise small businesses, helping them claim credits they weren’t actually eligible for. Unfortunately, when small businesses are required to pay back the credits they mistakenly claimed (with added penalties) the ERC firms they trusted are often unavailable, dissolved, or deny any liability.
How can you safely claim the ERC, without putting your small business at risk of noncompliance?
The ERC is a great benefit to companies that are truly eligible for it. That’s why, if you experienced a significant business interruption during the pandemic and employed full-time workers, it’s worth looking into your options and finding out what’s really available to you.
But the consequences of working with an unqualified tax advisor are costly — including extra paperwork, lost time, fees, tax penalties, and the repayment of any credits misclaimed. Instead of working with an unvetted ERC agency, consider talking to a qualified tax expert and an accounting professional who understand your business’ unique circumstances — and exactly how the pandemic impacted your business.
These experts offer even greater knowledge of the ERC and all the tax benefits available to small businesses. They can help you access the credits available to you, without putting your business at risk of noncompliance, while accurately addressing your other small business tax questions.
Want more? In addition to taxes, CFO services, bookkeeping and accounting through its FinOps, Escalon’s Essential Business Services include PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.
