Employee Retention Credit: Educate Yourself and Beware of Schemes

While being just over halfway through 2023, you still have the opportunity to tap into the employee retention credit (ERC) that came about as part of the various COVID relief programs. However, it is important to understand the guidance issued by the IRS surrounding the program.

Claim the ERC

Once you have established that you meet the eligibility criteria and have paid out eligible wages during the qualifying periods in 2020 or 2021, you can still claim the ERC on an amended payroll tax return for up to three years after the original filing deadline. For 2020 the deadline is 4/15/24 and for 2021 the deadline is 4/15/25.

This gives you plenty of time to assess your eligibility claim for up to $5,000 per employee in 2020, or $7,000 per employee for each of the first three quarters in 2021, and quarter 4 of 2021 under the Recovery Startup Business provision.

When claiming the ERC, make sure to review the key points below to help document qualification in order to protect and defend your claim with the IRS, should the situation arise.

  • Can you prove that you experienced a significant decline in gross receipts or experienced a full or partial suspension of business operations?
  • If a full or partial suspension of business operations was sustained, can you identify specific governmental orders that triggered suspension, or produce records that helped to determine where specific governmental orders had a more than nominal effect on your operations?
  • Have you computed and documented your average number of full-time employees in 2019, in order to demonstrate whether you qualify as a small or a large employer?
  • If you are part of an aggregated group, have you documented how the aggregation has affected the eligibility for ERC?
  • If you received a PPP loan, have you allocated your wages between PPP loan forgiveness and the ERC, avoiding duplication?

Even after you have documented your basis for qualification, there are still a number of hurdles to overcome.

  • Currently with the IRS experiencing an increased amount of amended payroll tax returns, it is taking six to 12 months or longer to process amended returns and to subsequently issue refunds.
  • Once you have claimed the ERC, you should file amended federal income tax returns to reduce wage expense for the amount of the credit in the year the credit was generated. So, you will have to amend your 2020 and/or 2021 federal income tax returns.
  • Regardless of your due diligence in documenting your qualification, the IRS may audit your refund and potentially disallow it. This can mean repayment of the refund with the possibility of penalties and interest.

 Avoid schemes by aggressive fraudulent third party vendors

Be on the lookout for illegitimate third party vendors who tell you that you qualify for the ERC. The IRS has warned taxpayers against fraudulent and uneducated vendors that do not understand the full implications of the eligibility factors surrounding the ERC and do not follow the IRS issued Notices and Revenue Procedures.

Also, in many cases, these uneducated vendors may not have the ability to support you in your claim for the ERC. For example, they may not be able to appear before the IRS on your behalf, retain documentation supporting the credit, and more.

 Where we can help

If you believe you meet the eligibility requirements to claim the ERC, HHM can assist you in computing the credit. We can help you understand everything you need to know in regard to claiming the ERC.