Employee Retention Credit (Expires 04/15/25)

Recently the IRS has gone on the record by stating many of the outstanding ERC claims submitted prior to the moratorium (September 14, 2023) will be processed this Summer. Very little has been mentioned in reference to claims submitted after the moratorium that was imposed on September 14th although several of our tax clients have already received their checks. It is our opinion there is significant disinformation regarding the ERC in terms of pending disallowance notices that many taxpayers will allegedly receive. These notices will be sent to those who filed ERC claims while not owning a business during 2020 and 2021 and / or not having eligible W2 employees on payroll during this same period. According to the IRS Commissioner, the agency is still receiving over 17,000 ERC claims weekly. This is approximately $5 billion dollars’ worth of claims still being submitted in Mid-2024. When the IRS references “60-70% may be fraudulent filings and therefore denied", we assume they’re referring to many of the over 400,000 claims submitted year to date, and understandably so. The IRS now declares to have improved data analytics and technology along with additional staffing in order to verify claimants and therefore reduce the amount of refunds issued to fraudsters.

According to insiders, the IRS is now processing between 20,000 – 30,000 ERC claims weekly.  Due to these recent developments and direction provided by the IRS Commissioner, we are advising our clients to allow ample time for claims to be processed and to please notify us ASAP of any IRS communications you may receive from letters to payments.  Some letters may be time sensitive so it is imperative that you send us a copy as soon as you receive anything so we can respond if needed. 

The Employee Retention Credit (ERC) is a tax credit introduced by the U.S. government to support businesses affected by the COVID-19 pandemic. It was initially established under the CARES Act in March 2020 and subsequently extended and modified by later legislation.

Here are the key aspects of the Employee Retention Credit:

1. Purpose: The ERC is designed to encourage businesses to retain employees during periods of economic hardship caused by the COVID-19 pandemic. It provides financial relief by offering a tax credit against employment taxes for eligible employers who retain their employees, even if the employees are not working due to COVID-19-related circumstances.
2. Eligibility: Initially, the ERC was available to businesses that either fully or partially suspended operations due to government orders related to COVID-19 or experienced a significant decline in gross receipts (generally a 50% decline compared to the same quarter in the prior year). Eligibility criteria evolved over time with changes in legislation.
3. Credit Amount: The ERC initially provided a tax credit of up to 50% of qualified wages paid to each employee, up to $10,000 of wages per employee for all quarters in 2020. The maximum credit per employee was $5,000 for the year. 2020 is now expired but we are able to still claim 2021 until April 15, 2025.
4. Modifications and Extensions: The ERC has undergone several legislative changes and extensions. For example, under the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021, the credit was extended through 2021, expanded to cover more businesses, increased the credit rate, and modified eligibility criteria.
5. Interaction with Other Relief Programs: Businesses that received Paycheck Protection Program (PPP) loans were initially unable to claim the ERC, but this restriction was later lifted retroactively, allowing businesses to potentially claim both PPP loan forgiveness and the ERC for different wages and periods.
6. Claiming the Credit: Employers claim the ERC on their employment tax returns, typically Form 941, Employer's Quarterly Federal Tax Return. They can either reduce their federal employment tax deposits or request an advance refund from the IRS if the credit exceeds their federal employment tax liability.

The Employee Retention Credit has been a critical tool for businesses to help maintain their workforce and manage financial challenges during the COVID-19 pandemic. Its availability, eligibility criteria, and calculation methods have evolved with legislative changes, making it essential for businesses to stay informed and consult with tax professionals to maximize its benefits. The credit fully expires April 15, 2025.

Applying for the Employee Retention Credit (ERC) involves several steps and documentation requirements to ensure eligibility and accurately claim the credit. Here’s what you typically need to apply for the ERC:

1. Eligibility Determination: Assess whether your business meets the eligibility criteria for the ERC during the relevant periods. As of my last update, key eligibility criteria include:
   • Experiencing a full or partial suspension of operations due to a governmental order related to COVID-19.
   • Experiencing a significant decline in gross receipts, generally defined as a 50% decline compared to the same quarter in the prior year.

1. Qualified Wages Documentation: Identify and document the wages paid to employees during the periods eligible for the ERC. Qualified wages include wages and certain health plan expenses paid to employees while they are not providing services due to the reasons mentioned above (governmental order or decline in gross receipts).
2. Quarterly Calculations: Calculate the ERC for each eligible quarter. The credit is generally 50% of qualified wages paid to each employee, up to $10,000 per employee for all eligible quarters in 2020, and up to $7,000 per employee per quarter for 2021.
3. Comparison and Certification: Compare your gross receipts or operational status to the previous year to certify eligibility for each quarter you are claiming the credit. Maintain documentation supporting this comparison, such as financial statements, sales records, or other relevant documents.
4. Form 941 Reporting: Claim the ERC on your quarterly employment tax returns, typically Form 941 (Employer's Quarterly Federal Tax Return). On Form 941, report the total ERC claimed for the quarter and any other required information.
5. Record-Keeping: Maintain accurate records and documentation to support your ERC claim. This includes records of eligible wages, documentation of the decline in gross receipts or suspension of operations, and any other documentation required by the IRS.
6. Consultation with Tax Professional: Given the complexity of ERC eligibility criteria, calculation methods, and changes due to legislative updates, it’s advisable to consult with a tax professional or accountant who is knowledgeable about the ERC. They can help ensure compliance with IRS requirements, maximize the credit amount, and navigate any changes in eligibility or calculation methods.
7. IRS Forms and Guidance: Stay updated on IRS forms, instructions, and guidance related to the ERC. The IRS provides detailed information on how to calculate, claim, and report the credit, as well as any updates or changes to the program.

By following these steps and ensuring accurate documentation and compliance with IRS guidelines, businesses can effectively apply for and claim the Employee Retention Credit to help offset payroll costs and retain employees during periods of economic hardship caused by the COVID-19 pandemic.

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