“What your CPA (probably) isn’t telling you about the Employee Retention Credit may mean you’ll pay more taxes than necessary. 

 

The $2 trillion CARES Act of 2020 contains several provisions designed to help small businesses and self-employed individuals recover from the financial impact of COVID-19 pandemic measures. If you owned a business impacted by the pandemic, you may have participated in the Small Business Administration’s Paycheck Protection Program (PPP) or received an emergency grant. Both these programs are now closed.

However, a third relief measure remains open to qualified businesses- the Employee Retention Credit, or ERC. Created by the CARES Act and expanded through the Consolidated Appropriations Act of 2021, the ERC allows eligible businesses to get a refundable payroll tax credit of 50% of wages paid to employees during the crisis. The idea behind this credit was to incentivize companies to keep workers on the payroll during the pandemic.

Businesses that continued to pay their employees during the pandemic or experienced severe revenue declines from March 13, 2020, to December 31, 2021, may be eligible for hundreds, even thousands, of dollars in payroll tax credits. Once any payroll taxes (employer’s share of FICA taxes) owed to the IRS are paid in full, the remaining refund is tax-free and can be used in any manner the employer desires. The good news is that while the rest of the CARES Act is ending, it’s still possible to file an ERC claim in 2023, potentially saving your company thousands of dollars in payroll taxes.

Why haven’t I heard about ERC?

Although the ERC was part of the same legislation that gave us PPP, it got less press coverage. One reason is that the ERC was initially unavailable to businesses that took out PPP loans. In 2020, when the credit first rolled out, a business owner had to choose either the PPP loan or the ERC. For many business owners, it made more sense to take the PPP money.

However, once Congress discovered that businesses had claimed very little of the available ERC funds, they decided to revise the rules. Starting in 2021, they removed the restriction that prevented companies with PPP loans from applying for the ERC. Unfortunately, news of this significant change to the ERC didn’t trickle down to most business owners or their CPAs. Since ERC is a payroll credit not related to income tax, many CPAs did not want to inform clients about it, fearing increased liability issues and potential audits. Some CPAs continue to tell their business owner clients with PPP money that they are ineligible for the Employee Retention Credit.

 

Who is eligible for the Employee Retention Credit?

According to the IRS website, three main paths exist to qualifying for the ERC.

A company can qualify by having experienced a decline in gross receipts, meaning they had more than a 50% decline in one quarter of 2020 gross receipts compared to the same quarter in 2019. Or by having more than a 20% decline in one quarter of 2021 gross receipts compared to the same quarter in 2019.

A business may also be eligible if it experienced a full or partial suspension of operations due to government shutdown measures or by following orders from any US governmental authority.

The Recovery Startup Path may also be available to companies that started during or after the pandemic.

How do I apply for the ERC?

Most of the time, your CPA is not the best resource to help you apply for the Employee Retention Credit or answer any questions. That’s because most CPAs do not handle payroll taxes and are not usually well-versed in how the ERC works. CPAs may be hesitant to take on an ERC because they typically don’t have much to do with payroll taxes, and may not know how to file the 941x properly.  Your CPA may also be concerned about the increased potential for audits accompanying most government tax breaks.

While audits are always possible, they won’t be a problem if you follow all the relevant IRS rules. Partnering with an ERC specialist is one way to ensure that even if your company gets audited, you’ll come out OK, with money in your pocket. For instance, the company I work with has processed over 40,000 ERC applications without any adverse audit outcomes.

To apply for the Employee Retention Credit, complete a 941-X form with the correct credit amounts. You must include the following:

  • The refundable and non-refundable portions.
  • The correct qualified wages amount.
  • Your qualifying health plan expenses, if any.

You have to claim the credit within three years from when your original 941 was due. Eligible businesses must file a 941-X for the specific qualified quarter. You must complete certain lines on the 941-X that tell the IRS you are entitled to the refund. Similar to other types of refunds, you must indicate the qualifying wages and health expenses used to claim the ERC.

Having your payroll provider or accountant complete this form is almost always best. However, as I mentioned, CPAs are sometimes reluctant to assist you with the ERC. And payroll companies typically charge you an upfront fee whether or not you qualify.

You can file for the credit yourself, but given the complicated IRS rules, you risk making a mistake that could cost you even more money. I advise finding a trustworthy consultant to help ensure you don’t make errors claiming the ERC that could cause you headaches and cost you money later.

 

Summing it up: The Employee Retention Credit is a significant credit that some business owners overlook, believing they won’t qualify. But, changes to rules mean that even businesses who took PPP loans could be eligible provided they meet specific IRS criteria. As with other tax credits, the process is a bit complicated. You must jump through IRS hoops and ensure you meet all requirements. However, considering that some businesses have received hundreds of thousands in payroll tax credits, applying for the ERC is undoubtedly worth the effort.

Would you like to know if YOU are eligible in 15 minutes or less?

Find out more now and check your eligibility at

www.erc-information.com.

or, give me a call at 951-658-0492 and I will send you more information.