In a world where scams and fraudulent schemes abound, it’s natural to approach offers of monetary assistance with skepticism. However, not every financial lifeline is a hoax, and the Employee Retention Credit (ERC) is a prime example. Instituted by the United States government through the CARES Act in response to the COVID-19 pandemic, the ERC is a legitimate and valuable resource designed to support eligible employers during challenging times. In this comprehensive guide, we will unravel the intricacies of the ERC, debunk common myths, and equip you with the knowledge needed to determine if you qualify for this critical tax credit.
Defining the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is not a mirage; it’s a tangible financial relief program enacted to encourage eligible employers to retain their workforce and sustain payroll operations amid the pandemic’s economic fallout. At its core, the ERC is a refundable payroll tax credit, primarily offsetting employment taxes. What sets it apart is that, in many cases, the refundable portion of the credit surpasses the original payroll tax liability, resulting in employers receiving a substantial tax refund.
Eligibility Criteria for Employers
Determining your eligibility for the ERC is a crucial first step. The program is designed to assist businesses that have faced specific challenges during the pandemic. To qualify, employers must meet one of the following criteria:
Full or Partial Shutdown
Your business experienced a full or partial shutdown due to government-mandated lockdown orders from the COVID-19 pandemic. This encompasses various scenarios: suspensions, operational limitations, reduced business hours, occupancy restrictions, sanitation-related early closures, and diminished capacity to provide consistent customer service.
Significant Decline in Gross Revenue
Your business suffered a substantial decline in gross revenue during 2020 and 2021 compared to the preceding year. Objective tests must support this decline and reflect businesses unable to adapt their operations to mitigate revenue loss.
Distinguishing ERC from PPP
While the ERC and the Paycheck Protection Program (PPP) share the goal of aiding businesses affected by the pandemic, they operate differently:
PPP
This program offered forgivable loans through the Small Business Administration (SBA), primarily aimed at retaining employees during the pandemic. PPP loans were disbursed directly into business bank accounts and could be used for payroll and other operational costs.
ERC
In contrast, the ERC is a refundable tax credit claimed against employment taxes paid by W-2 employees. Notably, it is not a loan. ERC claims are submitted to the Internal Revenue Service (IRS), resulting in paper check refunds. Thus, updating your address with the IRS is essential to receive your refund check.
Proof of the ERC’s Authenticity
To dispel any doubts about the legitimacy of the ERC, one need look no further than the IRS. The IRS has issued multiple statements, FAQs, and public notices about the Employee Retention Credit. These official communications include ERC launch announcements, comparison charts for 2020 and 2021, and comprehensive guidance on ERC provisions under various legislative acts. The IRS has even issued scam warnings, distinguishing genuine ERC claims from fraud.
Common Misconceptions Surrounding the ERC
The ERC is shrouded in myths and misconceptions, which we aim to debunk:
- Exclusivity with PPP. Businesses need to be made aware that businesses cannot apply for the ERC and PPP. Initially, this was true, but legislation expanded the ERC’s eligibility, allowing eligible companies to participate in both economic relief programs.
- Program Conclusion. Another myth is that the ERC program has concluded, leading businesses to believe they missed the deadline for filing. While specific timeframes have passed, eligible employers can submit amended returns for specified quarters in 2020 and 2021, providing ample opportunities to claim the ERC.
- 50 Percent Revenue Decline Requirement. Some believe that if their business did not experience at least a 50 percent decline in gross receipts, they would be ineligible for the ERC. Legislative updates in December 2020 expanded eligibility criteria, making it more accessible for businesses to qualify, with a reduced 80 percent threshold for 2021.
Conclusion
The Employee Retention Credit (ERC) is a tangible resource, not a financial mirage. It was crafted to provide genuine assistance to businesses during the trying times of the COVID-19 pandemic. However, navigating the complexities of ERC eligibility, wage calculations, and tax credit optimization can be daunting.
I specialize in guiding businesses through the ERC filing process, ensuring they receive the maximum tax credit they qualify for. I am well-versed in ERC regulations, and we approach every case with a compliance-first mindset. We stand with you at every stage, from initial assessment to return tracking.
While ERC misconceptions abound, the reality is that this valuable tax credit remains accessible to eligible employers. It’s still possible to explore the benefits of the ERC and leverage it as a financial lifeline for your business. Contact me today to schedule a consultation and embark on a journey to harness the full potential of the Employee Retention Credit.
Solutions by Mike Miller, CPA 