Top Mistakes to Avoid When Claiming the Employee Retention Credit

In a world where business dynamics change by the minute, staying informed about tax credits and incentives is critical for all companies. One such provision that has provided significant financial relief to businesses is the Employee Retention Credit (ERC). The ERC is a refundable tax credit designed to encourage businesses to keep employees on their payroll amidst challenging economic times.

The purpose of this blog post is to educate you on the key aspects of the ERC and to help you navigate its complexities. We aim to prevent you from falling into common pitfalls that could lead to errors in your claim. In doing so, we hope to aid your business in optimizing its benefit from the ERC, contributing to your resilience and success.

As we dive into this topic, we’ll be covering everything from the fundamental understanding of the ERC, and its eligibility criteria, to the top mistakes businesses make when claiming it. You’ll also find a guide on how to correctly claim the ERC and answers to frequently asked questions. By the end of this post, you will be armed with the knowledge and insight needed to effectively navigate the ERC process.

So, let’s get started! Our goal is to make this journey as simple as possible for you, ensuring your business reaps the full benefits of the Employee Retention Credit.

Understanding the Employee Retention Credit (ERC)

Before we delve into the mistakes you must avoid when claiming the Employee Retention Credit, it’s essential to first establish a foundational understanding of what the ERC is and the benefits it offers.

The Employee Retention Credit (ERC) is a fully refundable tax credit that was introduced under the CARES Act of 2020. This credit was enacted as a response to the financial strain many businesses faced due to the COVID-19 pandemic. The ERC is designed to incentivize employers to retain their workforce during periods of significant disruption and economic uncertainty.

The way it works is relatively straightforward: Eligible employers can claim credit for a percentage of the wages they pay to their employees. The specific percentage and the cap on the credit may have changed over time or may change in the future, depending on the legislation in place. As of my knowledge cutoff in September 2021, the credit was 70% on the first $10,000 in wages paid to an employee per quarter.

If you meet the requirements, you may be eligible for a sizable decrease in your share of the federal payroll tax. If an employer’s credit for the share of Social Security (or Railroad Retirement Act Tier 1) tax for all employees in a calendar quarter is greater than the employer’s total liability for that quarter, the excess is repaid to the employer.

However, as with all tax provisions, the devil is in the details. While the ERC can provide substantial benefits, claiming it can be complex and requires careful navigation. Missteps can result in denied credits or unexpected tax liability. But don’t worry – we’re here to guide you through this process and help you avoid the common pitfalls.

In the following sections, we will dive deeper into the eligibility criteria for the ERC, the top mistakes to avoid when claiming it, and how to correctly claim this credit. By staying informed and diligent, you can ensure your business capitalizes on this beneficial provision and bolster your financial resilience. Stay tuned!

Eligibility Criteria for ERC

Determining whether you qualify for the Employee Retention Credit (ERC) involves several key factors. Understanding these eligibility requirements is the first step in avoiding costly mistakes. Here are the main criteria to consider:

1. Business Operation Impact

To qualify for the ERC, your business operations must have been either fully or partially suspended by a governmental order related to COVID-19 during a calendar quarter, or your gross receipts must have declined significantly.

Your quarterly gross receipts must be less than 50% of the gross receipts for the same quarter in 2019 to qualify for 2020 or less than 80% of the gross receipts for the same quarter in 2019 to qualify for 2021. For further up-to-date information on these limits, please refer to the most recent regulations.

2. Employee Count

Your total number of employees also plays a role in determining your eligibility and how the credit is calculated. As of my knowledge cutoff in September 2021, businesses with 100 or fewer employees in 2019 could claim the ERC for all employees, while larger businesses could only claim the credit for employees who were being paid but not providing services due to the disruption caused by COVID-19.

3. Wage Calculation

The ERC is based on qualified wages, which include certain health plan expenses. However, the definition of qualified wages varies depending on your employee count and the specific circumstances of your business disruption.

4. PPP Loans

You may still be eligible for the ERC even if you have taken out a loan through the Paycheck Protection Program (PPP). However, the ERC cannot be used for income that was acquired through the discharge of a PPP debt.

It’s crucial to note that these criteria can be nuanced, and additional rules may apply. For the most accurate and up-to-date information, it’s always best to consult with a tax professional or visit the IRS website directly. In our next section, we’ll dive into the common mistakes businesses make when claiming the ERC and how to avoid them to ensure you’re getting the maximum credit you’re entitled to.

Top Mistakes to Avoid When Claiming ERC

While the Employee Retention Credit (ERC) can be a significant financial boon to your business, there are numerous potential pitfalls you must be aware of when making your claim. Here are some of the most common mistakes businesses make:

1. Misunderstanding the Eligibility Criteria

Misunderstanding or misinterpreting the ERC’s eligibility rules is the first and possibly most common mistake made by enterprises. Keep in mind that the ERC is geared toward companies that have been negatively impacted by government orders due to COVID-19 or that have shown a large drop in gross receipts. Failure to complete these requirements before claiming the ERC can cause complications later on.

2. Failing to Properly Document Retention Efforts

Documentation is key when claiming any tax credit, and the ERC is no exception. If your business’s operations have been impacted by COVID-19, it’s crucial to maintain detailed records that show how your business was affected and what measures you took in response.

3. Double-Dipping with Other Credits

Claiming the ERC for wages that have been used to claim other tax credits is not allowed, a practice often referred to as “double-dipping.” For example, you cannot claim the ERC on wages used for the Work Opportunity Tax Credit or wages paid with forgiven PPP loan proceeds.

4. Incorrectly Calculating the Credit

The calculation for the ERC can be complex, especially for businesses with more than 100 employees. It involves the accurate assessment of ‘qualified wages,’ which can include health plan expenses. Mistakes in this calculation can lead to claiming a lower credit than you’re entitled to or claiming a credit you’re not fully eligible for.

5. Missing Deadlines

Lastly, missing the deadlines for claiming the ERC can mean missing out on the credit altogether. The credit is claimed on your quarterly employment tax return, and late filings can lead to lost opportunities.

Avoiding these mistakes will put you on a solid path toward securing the benefits of the ERC. It’s important to stay informed, consult with tax professionals if needed, and act diligently to maximize your claim.

In the next section, we will provide a step-by-step guide on how to correctly claim the ERC to ensure you’re not leaving any money on the table.

How to Correctly Claim the ERC

Now that we’ve covered the common pitfalls to avoid, let’s discuss the correct way to claim the Employee Retention Credit (ERC). Here’s a step-by-step guide to help ensure you’re optimizing your ERC claim.

Step1: Assess Eligibility

The first step is to thoroughly assess your eligibility. Check to see if your operations were suspended due to a government order related to COVID-19 or if your gross receipts have significantly declined. Be sure to understand the specific thresholds and terms that apply to your business.

Step2: Determine Qualified Wages

Next, determine the ‘qualified wages’ you’ve paid to your employees. Depending on the size of your business and the specifics of how your operations were impacted, this may include health plan expenses and could differ for each employee.

Step3: Avoid Double-Dipping

Ensure that the wages you’re claiming for the ERC have not been used for any other tax credits or forgiven PPP loan expenses. Be diligent in keeping your records and calculations separate to avoid any potential ‘double-dipping.’

Step4: Calculate the Credit

Once you’ve determined your qualified wages, calculate your credit. Remember, this is typically a percentage of qualified wages up to a certain cap, but always check the most recent guidelines to confirm the exact amount you’re entitled to.

Step5: Claim the Credit

The ERC can be claimed on your quarterly employment tax return using Form 941. If your credit exceeds your total payroll tax liability, you can receive the excess as a refund. You can also request an advance of the credit using Form 7200 if your credit will exceed your payroll tax deposits.

Step6: Maintain Documentation

Lastly, be sure to maintain thorough documentation of everything: the impact on your business operations, your qualified wages calculation, your credit calculation, and your claim. This is crucial not only for your own records but also in case of any future audits or inquiries.

This step-by-step guide should help you successfully claim the ERC. However, due to the intricacies involved in this process, it’s always recommended to consult with a tax professional to ensure you’re making the most of your claim. Don’t miss out on this significant opportunity to support your business’s financial stability during challenging times.

Frequently Asked Questions about the ERC

To further help you understand and navigate the Employee Retention Credit (ERC), we’ve compiled a list of frequently asked questions and their answers.

Can I claim the ERC if I’ve received a PPP loan?

Yes, you can claim the ERC even if you’ve received a PPP loan. However, you cannot claim the ERC on wages that have been paid with forgiven PPP loan proceeds. This would be considered ‘double-dipping’ and is not allowed.

How are ‘qualified wages’ defined?

‘Qualified wages’ generally include the wages and compensation paid to employees, along with certain health plan expenses. The specifics can vary depending on the size of your business and the nature of your operations.

How do I determine if my operations were ‘partially suspended’ due to a governmental order?

A ‘partial suspension’ generally refers to a situation where your business could continue some, but not all, of its typical operations due to a government order related to COVID-19. This could include capacity restrictions, closures of certain locations, or restrictions on certain activities.

What if my business started after 2019?

For businesses that started after 2019, different rules may apply. In general, these businesses can still qualify for the ERC if they meet the other eligibility criteria. You should consult with a tax professional or the IRS directly to understand how these rules apply to your business.

How can I claim an advance on the ERC?

If your ERC is expected to exceed your federal employment tax deposits, you can request an advance using Form 7200. However, this may not be available to larger employers.

Conclusion

Navigating the intricate landscape of tax credits like the Employee Retention Credit (ERC) can be a daunting task for any business. However, armed with the right information, you can effectively leverage these provisions to provide significant financial support to your organization during challenging times.

From understanding the eligibility criteria to avoiding common pitfalls and correctly claiming the credit, we’ve covered a broad range of topics related to the ERC in this blog. We trust this information will empower you to make informed decisions and maximize the benefits from this valuable credit.

It’s important to remember that the rules surrounding the ERC can be complex and may change over time. Therefore, staying updated and seeking professional tax advice is always recommended. The goal is to provide your business with the best possible financial stability, and the ERC can play a crucial role in achieving this.

So, be proactive, be informed, and let’s continue to navigate this complex business environment together. Your resilience and success are what drive our economy forward.