Unlocking the Secrets of the Employee Retention Tax Credit: Debunking Myths and Seizing Opportunities
You’ve likely seen commercials or radio ads for the Employee Retention Tax Credit or perhaps you’ve fielded a few emails or calls about it. If you’re anything like me, you may even have thought “Wow! This seems too good to be true…Is this a scam?” I assure you, it’s not.
The Employee Retention Tax Credit (ERC) has been a lifeline for many companies, helping them navigate the real hardships caused by COVID-19. Some businesses qualify given their hardship during COVID, while others qualify in what seems like ‘blind luck.’
Consider this, a company could be eligible for the tax credit in Q1 of 2021 if their sales dipped by 20% from Q4 of 2020, compared to the same period in 2019. Such fluctuations might be a result from different factors – but ultimately impacting their tax obligations for the respective years. Additionally, businesses can qualify for multiple quarters if their revenues were down by 20% in Q1-Q3 of 2021 when compared to the same quarters in 2019.
Navigating the ERC tax credit may seem like uncharted territory for even the most seasoned CPAs or bookkeepers, with only an only a small percentage who might have a general understanding of the rules governing the ERC. Below, I share information on the qualifications for this tax credit and provide insight to help business owners make the most of this opportunity.
Understanding the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERC) is a federal tax incentive program implemented to help businesses retain their employees during challenging times. Congress introduced the ERC as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 pandemic.
Businesses must meet certain criteria, to include continuous operations during eligible periods, a significant decline in gross receipts, or an organization with below 500 employees. Those with more than 500 employees can also qualify but have different eligibility calculation criteria.
The ERC is calculated as a percentage of qualified wages paid to eligible employees during the eligible periods. For 2020, the credit equals 50% of qualified wages, capped at $10,000 per employee per year. For 2021 and 2022, the credit is increased to 70% of qualified wages, capped at $10,000 per employee per quarter.
Initially, qualified wages were limited to wages paid during business suspension or significant decline in gross receipts. Recently, the ERC expanded to include additional wages regardless of business operations or revenue decline.
Receiving advance payments for the ERC helps improve cash flow for businesses. Businesses can utilize these funds to cover operational expenses, invest in growth opportunities, or strengthen the organization’s financial stability. For employees, it provides job security during challenging periods,
Businesses must meet these specific requirements and demonstrate eligibility to qualify.
- Business operations: The credit is available to employers who continue to operate their trade or business during the eligible periods.
- Business suspension or significant decline in gross receipts: For 2020, businesses with a decline of 50% or more in any quarter compared to the same quarter in the previous year are eligible. For 2021 and 2022, the threshold declined to 20% or more.
- Employee count: The ERC is available to businesses of all sizes, including tax-exempt organizations. However, there are differences in the calculation for employers with more than 500 employees.
- Interaction with other relief programs: Consider how the ERC interacts with other relief programs, such as the Paycheck Protection Program (PPP). Businesses can’t use the same wages for ERC and PPP claims. It is seen as double-dipping and is prohibited.
- Qualified wages: Businesses must identify and calculate the qualified wages for eligible employees to claim the ERC. For 2020, qualified wages were limited to $10,000 per employee per year, while for 2021 and 2022, the limit was increased to $10,000 per employee per quarter.
- Documentation: Businesses seeking to claim the ERC must maintain accurate, detailed documentation to support their eligibility. This documentation may include records of gross receipts, government orders that caused operations suspension, and records of employee wages during eligible periods.
The availability and eligibility of the ERC have been extended and expanded beyond the initial period–March 13, 2020, to December 31, 2020. Businesses can refer to the most up-to-date official sources, such as the IRS website, to determine the specific eligible periods for claiming the ERC.
The Employee Retention Tax Credit (ERC) can potentially interact with other tax credits and benefits. These interactions may include the Paycheck Protection Program (PPP), the Work Opportunity Tax Credit (WOTC), and other tax incentives like the Research and Development Tax Credit (R&D) – or the credit for the disabled or elderly.
The primary objective of the ERC is to encourage employee retention. Businesses can maximize the credit by implementing strategies to retain their workforce; consider offering competitive salaries, providing training and development opportunities, or creating a positive work environment that fosters employee engagement and loyalty.
While the Employee Retention Tax Credit provides valuable benefits to businesses, here are some challenges and limitations to consider:
- Insufficient or incomplete documentation can result in delays or potential denials of the credit.
- The eligibility criteria for the ERC can vary based on legislative changes and IRS guidance. It can be complex, especially for those without a dedicated tax or accounting team.
- Ensuring accurate calculations and timely claims submission can be demanding, especially for businesses with complex payroll systems or multiple locations.
Businesses should always stay informed about the latest IRS guidance and legislative updates, seek professional guidance, maintain accurate records, and stay proactive in monitoring eligibility.
In 2020 it seemed as if there wasn’t a single industry exempt from the impact of COVID. I had a client whose CPA believed they didn’t qualify for the ERC. I asked him to send me his sales from 2019 – 2021. After giving it a closer look, their company did meet the criteria under the alternative method – one that qualifies a business when sales are down 20%. This resulted in a substantial $250k credit, which enabled my client to afford his employees’ health insurance coverage.
His experience emphasizes the importance of understanding the nuances of the ERC, making the most of its benefits during challenging times, and working with qualified CPAs.
Like many tax credits, the ERC has evolved since its inception. Congress made changes in response to the evolving economic conditions and legislative actions. Government websites like the Internal Revenue Service and the U.S. Congress can provide up-to-date information on updates, including the deadline to claim the credit.
Businesses that leverage ERC availability can enjoy a positive work environment, as employee retention enables normal functioning during challenging times. As a result, there will be competitive compensation, opportunities for career growth, and a strong organizational culture.
Stakeholders and organizations can utilize ERC and similar programs to help make informed cash flow management and budgeting decisions.
There have been instances where claims have been misrepresented on 941 forms creating intended or unintended fraud. Unfortunately, there are few protections in place. Navigating the ERC credits should be done cautiously and verified with a trusted CPA/bookkeeper.
Solyco Capital is an independent equity group that offers capital solutions to late-startup and growth companies. We can guide you in navigating the complexities of ERC and other financial strategies.Share On LinkedIn More News & Views