In the wake of economic disruptions caused by the COVID-19 pandemic, the U.S. government introduced a variety of relief programs to support businesses. One such lifeline, often overlooked by many, is the Employee Retention Credit (ERC). If you’re a business owner or financial decision-maker, understanding how the ERC works and how it could benefit your organization is crucial.
In this article, we’ll break down what the ERC is, who qualifies, and why enlisting a tax advisor for expert guidance is essential to maximizing your potential refund.
What is the Employee Retention Credit (ERC)?
The ERC was introduced as part of the CARES Act in 2020 and later expanded under subsequent legislation, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021. The ERC is a refundable payroll tax credit designed to help businesses keep employees on their payroll during periods of significant economic hardship.
Businesses can claim the credit on qualified wages paid to employees, and depending on the year, the credit can be quite substantial. In 2020, businesses could claim up to $5,000 per employee annually, and in 2021, the credit increased to up to $7,000 per employee per quarter.
Who Qualifies for the ERC?
Eligibility for the ERC is based on a few key factors:
- Business Disruption: Your business was fully or partially suspended due to government orders related to COVID-19, or experienced a significant decline in gross receipts.
- In 2020, a decline in gross receipts was defined as a 50% decrease compared to the same quarter in 2019.
- In 2021, the threshold for a significant decline was lowered to a 20% decrease.
- Qualified Wages: The wages eligible for the ERC depend on the size of your business:
- For 2020, businesses with 100 or fewer employees could claim the credit on all wages paid to employees, regardless of whether they worked or not.
- For 2021, the threshold was raised to 500 employees, allowing more businesses to benefit.
- PPP Loan Recipients: If your business received a Paycheck Protection Program (PPP) loan, you might still qualify for the ERC. Changes to the law allowed businesses that received PPP loans to claim the ERC retroactively, as long as the wages used for the ERC weren’t the same as those forgiven under PPP.
Why You Need a Tax Advisor to Claim the ERC
Navigating the ERC can be complex, especially with the ongoing changes in legislation. The process requires detailed documentation and accurate calculations to ensure compliance. Mistakes can lead to under-claiming the credit or, worse, facing penalties for over-claiming. This is where a qualified tax advisor becomes invaluable.
- Accurate Assessment of Eligibility: A tax advisor will review your financial records and operational impact during the pandemic to determine if you meet the eligibility requirements for each year. They will identify which quarters your business qualifies for the ERC and how to optimize your claim.
- Optimizing the Credit: While the ERC is designed to support businesses, the criteria for what counts as “qualified wages” can vary, depending on the size of your business, employee count, and other relief funds received. A tax advisor can help ensure that you maximize the credit while staying within the legal boundaries.
- Avoiding Common Pitfalls: Applying for the ERC involves a series of technical steps, including amending payroll tax forms (like the Form 941-X) and tracking wages and health plan expenses that qualify. Missing deadlines, failing to properly substantiate your claims, or misunderstanding the interaction between the ERC and PPP loans can result in costly mistakes.
- Retroactive Claims: Even if you didn’t claim the ERC in 2020 or 2021, it’s not too late. Businesses have up to three years to retroactively amend their payroll tax returns and claim the credit for previous periods. Your tax advisor can help identify missed opportunities and guide you through the process of amending returns.
The Financial Impact of the ERC
The ERC can significantly improve a business’s cash flow, especially when claimed retroactively. In many cases, businesses that were initially unaware of their eligibility have recovered hundreds of thousands of dollars in credits. The credit is fully refundable, meaning if your ERC amount exceeds your payroll tax liability, the IRS will issue you a refund.
Given the financial stakes, missing out on the ERC could mean leaving money on the table that could be used for future growth or stability.
Conclusion
The Employee Retention Credit is one of the most substantial relief options available to businesses impacted by the COVID-19 pandemic. However, the complexity of the ERC means that many businesses may not have fully leveraged this opportunity. Working with a tax advisor ensures that you not only maximize your eligible refund but also remain compliant with the ever-changing regulations surrounding this credit. An ERC specialist can help businesses navigate the complexities of the Employee Retention Credit to maximize their potential refunds.
At Corporate Tax Advisors, our team of tax professionals is here to help you navigate the ERC and other tax-saving opportunities. Contact us today for a personalized consultation and let us help you secure the refunds your business is entitled to.
Further Reading: What Is the ERC Government Orders Test?, CPA’s: How to Safeguard Your Clients: Employee Retention (ERC) Substantiation Reports
