In response to the economic challenges brought forth by the COVID-19 pandemic, Congress introduced the Coronavirus Aid, Relief and Economic Security (CARES) Act, which contained the Employee Retention Credit (ERC). But what is the ERC? The ERC is a refundable payroll tax credit introduced to provide financial relief to employers impacted by the pandemic. In this guide, we’ll explore the ERC in depth, including what it is, how it works, eligibility requirements and more.
What Is the ERC and How Does It Work?
If you’re an employer, you may have heard of the ERC, but what is the ERC credit exactly? The ERC is a refundable payroll tax credit created by the CARES Act to help businesses negatively impacted by the coronavirus pandemic. These businesses either experienced a significant decline in revenue or were impacted by government orders that limited their business activity. Eligible employers can claim a percentage of qualified wages paid to employees after March 12, 2020, and before Oct. 1, 2021.
However, to date, many businesses have failed to apply for the ERC for a variety of reasons. Some were confused by rules regarding the ERC and Paycheck Protection Program (PPP), which, at first, prevented employers from claiming the ERC if they received a PPP loan but was later reversed. As such, eligible employers can retroactively apply for the ERC if they failed to do so when the credit was first introduced.
If you’re an eligible employer, it’s crucial to understand the risks involved with claiming the ERC, as numerous scams encourage employers to claim the credit even if they might not meet the eligibility requirements.
Who Is Eligible for the ERC?
The ERC is available to trades or businesses that experienced a full or partial suspension of operations due to governmental orders or faced a significant decline in gross receipts during the COVID-19 pandemic. Below are the ERC eligibility criteria for 2020 and 2021:
2020 ERC Eligibility
Trades or businesses operating during the 2020 calendar year are eligible for the ERC if they experienced either of the following:
- A partial or full suspension of operations during any calendar quarter from governmental orders that limited commerce, group meetings or travel due to COVID-19.
- A significant decline in gross receipts of more than 50 percent compared to the same quarter in the previous year.
The IRS defines a partial suspension of operations as one of the following:
- The suspension of more than a nominal portion of business operations.
- Government-ordered modifications that had more than a nominal effect on business operations.
2021 ERC Eligibility
As of Jan. 1, 2021, trades or businesses operating during 2021 are eligible for the ERC if they experienced either of the following:
- A partial or full suspension of operations during any calendar quarter from governmental orders that limited commerce, group meetings, or travel due to COVID-19.
- A decline in gross receipts in the first, second or third calendar quarters of 2021, where gross receipts were less than 80 percent compared to the same calendar quarter of 2019.
Should You Claim the ERC?
Whether you should claim the ERC depends on meeting the eligibility requirements outlined in the previous section. Not all employers meet the eligibility requirements, and failing to choose a reputable adviser who can assist you throughout the ERC process can cause you to face noncompliance consequences, such as repaying the claimed amount plus penalties and interest.
How to Avoid ERC Fraud
The IRS has issued several warnings to alert employers of potential ERC fraud and scams that can put them at risk. Many of these scams, which can be found on the radio and online, advise employers to apply for the ERC even if they fail to meet the eligibility requirements. In response, the IRS is increasing their efforts to take action on these ERC claims. While some fraudulent third parties advise businesses to claim the ERC, the employer is ultimately responsible for the accuracy of the information they provide on their tax return.
It’s important to consult with a trusted adviser with a strong reputation and extensive experience in tax credits and incentives to avoid ERC fraud. If an adviser claims all businesses qualify for the ERC, that you will receive $26,000 for every employee, or if they advise you that certain individuals, such as spouses and family members, can be claimed as an employee of a business, it can be a sign of an ERC scheme.
What to Look for in an ERC Provider
Now that you understand the various types of ERC fraud and schemes, choosing a trusted ERC provider is one of the best ways to protect yourself and your business. The ERC is complex, requiring an extensive and carefully followed process with supporting documentation to prove your eligibility. The right ERC provider can help ensure you remain compliant and apply for the credit only if you meet the eligibility criteria. Here’s what to consider in an ERC provider:
- History: Does the ERC provider you’re considering have a history of helping employers claim tax credits and work with the IRS to claim business tax credits? Ensuring your ERC provider has a proven track record and a strong reputation can provide peace of mind, knowing they will support you throughout the ERC process.
- Process: Another factor to consider is the process an ERC provider uses to determine your eligibility. Experian Employer Services follows an extensive process that considers all paths for eligibility and the data from internal and external sources to support an eligibility determination.
- Aggregate group: Some ERC providers may fail to look at the aggregate group, which is when two or more entities share common ownership and must be considered a single employer. Failing to consider the aggregate group can result in inaccurate credit claims.
- Full-time vs. part-time employees: Another step your ERC provider should follow is looking at your full-time vs. part-time employees, as they can determine whether you’re considered a large or small employer. Your status as a large or small employer depends on the number of full-time employees and impacts what wages qualify for the credit calculation.
What Is the Deadline to Claim ERC?
Some tax advisers provide different deadlines for claiming the ERC, causing confusion and missed opportunities to claim the credit. However, there are only two deadlines for claiming the ERC:
- 2020: For all quarters in 2020, the deadline to claim the ERC is April 15, 2024.
- 2021: For all quarters in 2021, the deadline to claim the ERC is April 15, 2025.
To claim the ERC, employers must use IRS Form 941-X, Adjusted Employer’s quarterly Federal Tax Return or Claim for Refund. This form must be filed for each calendar quarter for which you claim credit.
Processing Time for ERC Applications
The only way to claim the ERC is by filing Form 941-X, which can be mailed or faxed but not filed online. With an influx of ERC claims, the IRS is currently backlogged. On Feb. 22, 2023, the IRS stated the count of unprocessed Forms 941-X totaled approximately 651,000. It’s estimated that the IRS processes roughly 120,333 ERC claims each month; however, on September 14, 2023, the IRS stated that it would not process any newly filed ERC claims until 2024. This statement should not dissuade eligible employers from claiming the credit, though they should set reasonable expectations for when they might receive their refund check.
Work With an ERC Expert at Experian Employer Services
If you meet the ERC eligibility requirements, you can take advantage of cash relief through significant credit amounts.