More than three years after the start of the COVID-19 pandemic, the Employee Retention Credit (ERC) is still available to qualified employers. After it was introduced in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC was retroactively updated and expanded a number of times. Those changes made it more accessible but also led to many Employee Retention Credit myths, causing some companies to lose out on disaster funding for eligible businesses. It’s important to dispel these misconceptions and gain a clear picture of valid ERC eligibility and benefits.
Common Employee Retention Credit Myths
The ERC was designed to encourage employers to retain employees during the pandemic by providing them with a refundable tax credit via the payroll tax system. However, despite its potential benefits, Employee Retention Credit myths have prevented some employers from taking advantage of this program.
Here are some of the common ERC misconceptions employers should be aware of:
A Complete Shutdown of Operations Is Required
One of the most common Employee Retention Credit myths is that it is only available to businesses that were forced to shut down due to the COVID-19 pandemic. In fact, there are several different ways that businesses can qualify for the ERC:
- Businesses that were required to suspend a portion, but not all of their operations due to government orders;
- Businesses that experienced a significant decline in gross receipts in any calendar quarter of 2020 or 2021; and
- Recovery startup businesses that began operations after February 15, 2020, with annual gross receipts of $1 million or less to qualify for the ERC just in the third and fourth quarters of 2021.
Paycheck Protection Program (PPP) Loan Recipients Are Not Eligible
Many employers are unaware that they can take advantage of both the Paycheck Protection Program (PPP) loan and the ERC. This is one of the common Employee Retention Credit myths because, initially, businesses that received a PPP loan were not eligible for the ERC. However, subsequent legislation retroactively amended that provision.
Still, there are some important rules on coordinating the PPP and ERC. Employers cannot claim the ERC for the same wages that were included in PPP loan forgiveness.
The ERC is not Available to Tax-Exempt Organizations
The CARES Act specifically allows tax-exempt organizations to be considered eligible employers, just like for-profit businesses. Tax-exempt organizations that are eligible for the ERC include:
- 501(c)(3) organizations, such as religious, charitable, educational, and scientific organizations;
- 501(c)(19) organizations, which include veterans’ organizations; and
- Tribal government entities.
However, tax-exempt organizations that receive government grants to pay for payroll costs may not eligible for the ERC for those wages that are covered by the grant.
The ERC Is Only Available for Certain Types of Employees
One of the common Employee Retention Credit myths is that only certain types of employees are eligible for the ERC. However, it is available for all employees, regardless of their job title or role within the organization.
Employers can claim the credit for all employees, including full-time and part-time employees as well as seasonal and temporary workers. At the same time, there are some restrictions on the types of employees for which the ERC can be claimed. For example, employers cannot claim credit for wages paid to an employee who is related to the business owner or is a 50% owner of the business.
The IRS Canceled the ERC
While the IRS declared a “moratorium” on the processing of new ERC claims, the program remains unchanged. The IRS is concerned about fraudulent and irresponsible ERC claims and has stated that they will apply more scrutiny to any new claims submitted before the statutory deadlines. This will likely cause claims to take longer to be processed. But eligible employers still have until April 15, 2024 to file claims for quarters in 2020 and until April 15, 2025 to file claims for quarters in 2021.
An ERC Fact: It Is a Win-Win for Employers and Employees
Given the complexities in the program, employers must be careful when trying to determine whether their business is eligible. It is critical to look closely at the requirements of the law and relevant government orders as well as to document and detail how businesses qualify and meet the necessary IRS guidelines.
It can be challenging for employers to stay up to date on the rules and requirements, calculate the amount of the credit, and gather the necessary paperwork and documentation. However, they can easily resolve this by outsourcing the entire process of assessing whether they meet the eligibility criteria and which quarters they can claim the credit for. Furthermore, a team of experienced professionals can ensure accurate calculations of the credit amount based on the employer’s specific situation, organize the required documentation and make sure it is submitted correctly.