Should You Apply for the Employee Retention Credit?

The Employee Retention Credit (ERC) was first introduced as an aid to businesses affected by Covid 19 epidemic. Though it was first introduced in March 2020 and has since expired, there are still opportunities for employers to take advantage of it in 2023 so they can enhance their employee retention ratio. The ERC credit is a broad-based refundable tax credit that can be filed against employment taxes. So today, we will clarify your doubts about whether or not you should claim the Employee Retention Credit. We will provide an overview of the ERC and its purpose.

Furthermore, we will delve into the ins and outs of the ERC and employee retention. We will also include details on the ERC, how it works, and how to file for it. So as you are done reading through this post, you will better understand the ERC and whether it is right for your business.

Overview of the ERC

The IRS introduced the ERC tax credit to help businesses that continued paying their employees despite COVID-19 shutdowns or significant downturns in receipts between March 13, 2020, and December 31, 2021. Many traders and businesses are still eligible to claim ERC tax credit. The case is their business must have met a partial or complete suspension due to government orders or pandemics. Employers can check their eligibility for the ERC by comparing their gross revenue in a fiscal quarter to the same calendar quarter in 2019. They may qualify for the ERC if the revenue is less than 50%.

Definition of the ERC

The ERC is a refundable tax credit equivalent to half of an employer's employee earnings that may be used for various employment taxes. You may be eligible for a credit amount that equals 50% of up to $10,000 of qualified wages that were paid to employees between March 12, 2020, and January 1, 2021, for the 2020 credit. For the 2021 credit, you may qualify for a credit equaling 70% of up to $10,000 of the qualified wages that were paid to employees between December 31, 2020, and October 1, 2021.

Eligibility criteria

Suppose your company got affected by COVID-19 and had to limit its operations, travel, or group meetings due to government orders or experienced a significant decrease in revenue during the pandemic. In that case, they may qualify for the Employee Retention Credit (ERC). The eligibility and calculation rules for the ERC differ for the years 2020 and 2021. For companies with an average of 100 or fewer full-time employees in 2019, all the wages they paid during any period where their business operations were fully or partially suspended due to government orders qualify for the ERC.

Qualified wages

Qualified wages refer to the wages and compensation paid to an employee subject to Social Security tax and paid between March 12, 2020, and December 31, 2021. These wages also include the employer's qualified health plan expenses that are appropriately allocated to the wages. However, they do not include wages that have been considered for the payroll tax credit for required paid sick leave or family leave or for the Work Opportunity Tax Credit.

How the credit works

An employer claims the employee retention credit by reducing payroll tax deposits and reconciling these amounts on the quarterly Form 941. If tax deposits are insufficient to fund the credit, employers can file Form 7200, requesting an advance credit payment. The IRS has warned taxpayers to be careful with third-party advisors. They may urge employers to claim ERC credit refunds without proper documentation. This is because the marketplace has become crowded with such advisors, and some advertisements and direct solicitations may seem "too good to be true."

Deadlines and Limitations

When claiming the Employee Retention Credit (ERC), there are deadlines and limitations to remember. Here are some key points to consider:

Deadlines for retroactive claims

Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within certain dates. The ERC deadline for most businesses was on September 30, 2021. However, you can still claim it for up to three years after submitting your tax return.

Limitations on claiming the ERC

There are limitations on claiming the ERC, such as interaction with other tax credits and relief programs. For example, the Taxpayer Certainty and Disaster Tax Relief Act permits an eligible employer to take the ERC credit, even if the employer has received a Paycheck Protection Program (PPP) loan.

How to Claim the ERC

If you are eligible for the ERC, here are the steps to claim it:

1. Compile your basic business data: Gather your name, address, and Employer Identification Number (EIN).
2. Gather relevant financial information: Collect information on your qualified wages and health plan expenses.
3. Fill out Federal Form 7200: To seek immediate payment of the ERC, the employer must fill out Federal Form 7200.
4. Amend employment tax returns: Qualifying employers should amend employment tax returns to claim the ERC.

Documentation requirements

When claiming the ERC, you must provide documentation to support your claim. This may include:

• Documentation showing how COVID-19 impacted you.
• Documentation showing how you calculated your qualified wages and health plan expenses.

Common mistakes to avoid

Here are some pretty common mistakes that you must avoid when claiming the ERC:

• Failing to consider all eligibility requirements before applying.
• Not providing detailed explanations for over-reported amounts.
• Applying without consulting with appropriate legal and tax advisors.

Conclusion

The Employee Retention Credit (ERC) is a valuable opportunity for businesses to receive a refundable payroll tax credit for employee wages in 2020 and 2021. The ERC credit can be as much as $5,000 or $21,000 per employee, depending on the year. However, it's important to note that ERC has limitations. For example, not being able to claim it for wages reported as payroll costs for PPP loan forgiveness or certain other tax credits. While the ERC can greatly benefit employers, it can also be complicated. It's essential to assess your business's situation and eligibility before applying for the ERC. Consulting with a professional, such as the ERC Claim Credit team, for ERC guidance can help determine if this credit is appropriate for your business.