The Employee Retention Credit (ERC) is a legitimate, refundable payroll tax credit established under the CARES Act. The ERC was enacted to incentivize businesses to retain employees during a time of economic uncertainty caused by the COVID-19 pandemic. For 2020, eligible employers are allowed payroll tax credits of 50% of wages paid, up to $10,000 per employee, (max $5,000 credit per employee 2020). For 2021, the credit was increased to 70% of wages paid per employee, per quarter for the first three quarters of 2021, (max $21,000 credit per employee for 2021). While this is a legitimate payroll tax credit, some third parties are promoting overly aggressive interpretations of eligibility and computation of the credit.
An employer is eligible for the credit in the following circumstances:
- Orders from an appropriate governmental authority required a business to have a partial or full suspension of operations restricting commerce, travel, and group meetings due to COVID-19.
- Significant decline in gross receipts compared to 2019. A significant decline is defined as:
- 2020 – 50% or more reduction in quarterly revenues over the same quarter for 2019
- 2021 – 20% or more quarterly decline when compared to the same quarter for 2019
A “look back” quarter available, allowing a 2021 quarter to qualify by experiencing the 20% decline in gross receipts in the previous quarter. Therefore, for example, it the first quarter 2021 doesn’t qualify based on a 20% or more quarterly decline when compared to first quarter 2019, the “look back” quarter would allow qualification for the credit if there was a 20% decline in receipts in fourth quarter 2020 (the previous quarter) compared to fourth quarter 2019. The look back period for second quarter 2021 is first quarter 2021 over first quarter 2019; and the look back period for third quarter 2021 is second quarter 2021 over second quarter 2019.
Although the ERC was expected to be available for all four quarters of 2021, the Infrastructure Act, enacted November 2021, retroactively ended the ERC as of September 30, 2021 for most employers.
When dealing with third-parties advertising ERC claims, taxpayers should take caution and watch out for red flags. Many scams will require a large upfront fee, or a contingent fee based on the amount of the credit received and will promise big tax savings. Taxpayers should also be wary of advertisements with false information. For example, ‘businesses under a mask mandate are eligible for ERC,’ and ‘if your business experienced a disruption in the supply chain due to COVID-19, it qualifies for the ERC’ are both false claims. The IRS has extended the statute of limitations to review ERC claims from 3 years to 5 years, and taxpayers who improperly claim the credit may be liable for penalties and interest on top of repayment of the credit.
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