A part of the 2020 CARES Act, the Employee Retention Credit (ERC), also referred to as the Employee Retention Tax Credit (ERTC), is a refundable payroll tax credit designed to help small businesses with W-2 employees who were impacted by the COVID-19 pandemic. While the business impact needed to occur in 2020 or 2021, business owners still have time to claim the credit. Businesses can file for 2020 impacted periods until April 15, 2024, and for 2021 impacted periods until April 15, 2025.
Is your business eligible?
The ERC can be claimed for all W-2 employees who were on payroll during the affected period, even if they were not retained for the entire period. There are two ways the IRS determines eligibility, the first being a significant decline in a business’s gross receipts, which is defined as follows:
For 2020, more than a 50% decline compared to the same quarter in 2019.
For 2021, more than a 20% decline compared to the same quarter in 2019.
Businesses that don’t meet these thresholds may still qualify through the second criterion: if their operations were impacted by government orders. In addition to a full shutdown of operations, this qualification includes things like limitations on gatherings, time spent cleaning and sanitizing that cut into a productive work day, additional costs that arose from work-from-home orders, or critical supply chain disruptions.
Qualifying businesses that have since shut down operations or been sold can still claim this credit, as long as business owners have access to the company’s financial records, tax returns and the business bank account, since the refund check will come in the business’s name. However, keep in mind that if your business received a Payroll Protection Program (PPP) loan that was forgiven, you cannot claim the forgiven wages for the ERC.
How to claim the ERC
Filing for the ERC involves amending filed employment tax returns from the affected quarters, which may also require an amendment to income tax returns. The amount received will be based on several factors, including employee wages and hours.
Don’t expect the process to be fast, says Amber Kellogg, vice president of affiliate origination and management at Occams Advisory, a financial and professional advisory firm for small businesses. It can take up to two weeks to gather all of the required documentation and, if you’re working with a tax professional, another two weeks for them to complete their computation. Because of the volume of ERC claims, IRS review can take 90 days or more, according to Kellogg. Refunds are distributed by paper check, usually seven to 10 business days after a claim is approved.
To help expedite the process, be as proactive as possible in gathering documents, which should include things like sales receipts for 2019 and the affected quarters in 2020 and 2021, reports from your point-of-sale system, your original employment tax returns, business registration documents and a list of your employees.
Beware of ERC scams
Similar to other pandemic-relief government resources, the announcement of the ERC led to an influx of scams and false claims, the severity of which was enough for the IRS to pause its review of new claims until early this year.
If you receive money from the IRS under a false claim, you will be required to repay the amount, possibly with penalties and interest. And, if you pay a fraudulent third-party service to help you file a claim that turns out to be false, you likely won’t see that money again.
Understanding how ERC claims are filed is a good first step in protecting yourself from scams, as unscrupulous actors likely don’t know the ins and outs of the complicated process.
Mark Everson, vice chairman at tax consulting firm Alliantgroup and former commissioner of the IRS, also advises looking out for companies that have “ERC” in the name, and anyone who promises guaranteed or immediate results. Aggressive marketing, harassing phone calls and large upfront fees are other red flags.
Not everyone leads you astray intentionally. According to Kellogg, some tax professionals may overlook qualifying factors about your business because they don’t have the specific expertise, or they haven’t stayed up to date on regulatory changes. She recommends looking for advisors who specialize in tax compliance to complement the accountant you already work with.
Neither the complexity nor the timing should deter you from filing for the claim if you believe you qualify, Everson says. This is a “generous benefit” that you shouldn’t shy away from. Adds Kellogg: “It’ll make a difference in a business owner’s life, for sure.”