Is the Employee Retention Credit Legitimate?

The Employee Retention Credit (ERC) is a legitimate federal tax credit. This program aimed to encourage employers to retain employees on payroll during unprecedented economic disruptions.

Understanding the Employee Retention Credit

The Employee Retention Credit (ERC) originated with a federal act. Its primary purpose was to incentivize businesses to keep employees on their payroll. The ERC functions as a refundable payroll tax credit, meaning that even if a business’s credit amount exceeds its payroll tax liability, the excess can be refunded.

The credit was available for qualified wages paid during the COVID-19 pandemic. For 2020, the credit was 50% of qualified wages. In 2021, the credit increased to 70% of qualified wages.

These changes were largely due to congressional acts which expanded and extended the credit. The ERC is calculated based on qualified wages.

Determining Eligibility

Businesses can qualify for the Employee Retention Credit primarily through two distinct pathways: experiencing a significant decline in gross receipts or undergoing a full or partial suspension of operations due to a governmental order. The specific criteria for these pathways differ between the 2020 and 2021 periods of the credit.

For 2020, a business qualified if its gross receipts significantly declined compared to 2019. For 2021, the gross receipts threshold was more lenient, requiring a decline of more than 20% compared to 2019.

Alternatively, eligibility could be established if a business’s operations were fully or partially suspended due to orders from an appropriate governmental authority. Examples include mandatory closures, capacity restrictions, or travel limitations. The governmental order must have caused more than a nominal effect on operations, meaning a significant impact rather than minor adjustments.

Businesses that received Paycheck Protection Program (PPP) loans can still claim the ERC, but they cannot use the same wages for both programs.

Claiming the Credit

Once a business has determined its eligibility for the Employee Retention Credit (ERC) and calculated the qualified wages, the next step involves the procedural process of claiming the credit. The ERC is typically claimed by amending previously filed payroll tax returns.

Businesses generally use Form 941-X to claim the credit for prior quarters. A separate Form 941-X must be filed for each calendar quarter for which the business is claiming the ERC.

To complete Form 941-X for the ERC, businesses need to report the total qualified wages paid. Accurate and thorough record-keeping is important to support the information provided on the amended return, as the IRS may review claims.

The deadline for filing Form 941-X to claim the ERC is generally three years from the filing deadline of the original Form 941. For 2020 ERC claims, the deadline is April 15, 2024, and for 2021 claims, it is April 15, 2025. Businesses should be aware that the ERC reduces the wage expense deduction on their income tax returns, and an amended income tax return may be necessary to reflect this adjustment.

Engaging with Service Providers

While the Employee Retention Credit is a legitimate tax program, the significant financial benefits have led to the proliferation of third-party promoters, sometimes referred to as “ERC mills,” that may make misleading claims. The IRS has issued warnings about these aggressive marketers, emphasizing that businesses are ultimately responsible for the accuracy of their claims.

When considering assistance with an ERC claim, businesses should carefully vet service providers to ensure they are reputable. Reputable professionals include Certified Public Accountants (CPAs) or tax attorneys. Businesses should be cautious of providers who guarantee a specific refund amount without thoroughly reviewing the business’s unique financial details and eligibility.

Fee structures are another important consideration. Businesses should be wary of upfront fees or fees that are a large percentage of the anticipated refund, especially if the provider does not offer clear deliverables or detailed explanations of their process.

A legitimate provider will request comprehensive financial records and documentation to substantiate the claim. They will also adhere to current IRS guidance, rather than relying on broad interpretations or general recommendations. The IRS has increased its compliance efforts, including audits and criminal investigations, targeting both promoters and businesses with dubious claims. Businesses should avoid unsolicited communications or aggressive sales tactics promoting ERC services.