Employee Retention Tax Credit Updates from the IRS

employee retention tax credit updates
Table of Contents

Key Takeaways:

  • The ERC is a refundable tax credit that was implemented as part of the CARES Act in 2020
  • You could potentially receive up to $26,000 per employee if you qualify 
  • The ERC ended on September 30, 2021, but you can still claim the credit retroactively for three years from the date you filed the original tax return
  • You had to have closed your business partially or fully to be eligible for the ERC because of a government order or lost 50% in gross receipts in 2020 or 20% in 2021
  • The IRS recently released a warning to employers that some advisors are falsely claiming the business is eligible for a larger credit than it is or that it is eligible when it is not
  • These promoters charge hefty upfront fees that depend on a big refund
  • Businesses are still responsible for everything they report on their tax return
  • Seven FAQs about ERC updates to be aware of include:
    1. Was the ERC extended past 2020?
    2. Can I get a bigger credit for 2021?
    3. Can I claim the ERC if I received a PPP loan?
    4. Did I lose enough gross receipts to qualify?
    5. Will the ERC be extended for 2022 or 2023?
    6. How do I claim the ERC retroactively?
    7. How do I avoid fraudulent ERC advisors?

The COVID-19 pandemic continues to impact businesses across the United States. The government has implemented measures to provide financial relief since the pandemic began, and one of these measures is the employee retention credit (ERC), which was established at the beginning of the crisis in March 2020. 

The ERC is a refundable tax credit that helps companies impacted by the pandemic retain their employees and stay afloat. Updates to the original ERC have come from subsequent legislation, and the IRS has issued advice and warnings to help employers succeed. It is important for business owners to stay up to date on the latest information to take full advantage of this tax credit.

Navigating the ERC and all its requirements and deadlines can be complex. This guide walks through how the ERC works today, updates from the IRS about using a third party for advice, and seven frequently asked questions about ERC updates to be aware of.

How Does the Employee Retention Credit Work?

The ERC is a refundable tax credit available to eligible employers who experienced losses because of the COVID-19 pandemic. The program was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 and has since been extended and expanded by subsequent legislation, including the Consolidated Appropriations Act and the American Rescue Plan Act.

Eligible employers can claim the ERC for a percentage of eligible wages paid to employees. The credit is equal to 50% of qualified wages for wages paid between March 12, 2020, and December 31, 2020, up to a maximum credit of $5,000 per eligible employee for 2020. The credit increased to 70% of qualified wages for wages paid in the first three quarters of 2021, up to a maximum credit of $7,000 per eligible employee per quarter or $21,000 per employee per year. 

Note that the final quarter of 2021 can be claimed only by recovery startup businesses. These are businesses that started operations after February 15, 2020, and have less than $1 million in annual gross receipts. 

Eligible businesses must have at least one employee and meet one of these two requirements:

  • They had to close the business, fully or partially, in a qualifying quarter because of a government order
  • They lost at least 50% in gross receipts in 2020 or at least 20% in 2021 when compared to the same quarter in 2019

It’s also important to understand small versus large employers under the ERC. Large employers in 2020 were those with 100 or fewer full-time employees, but that number increased to 500 or fewer in 2021. Large employers can only use the wages paid to workers for not providing services, while small employers can use all wages paid to employees (both full-time and part-time) in qualifying quarters.

The ERC ended for most businesses on September 30, 2021; however, you can still claim the credit retroactively if you qualify. You have three years from the date you filed your original tax return or two years from when you paid the tax, whichever is later. 

Don’t miss out on your chance to claim the ERC if you qualify. The ERC provides eligible employers with a valuable opportunity to claim a tax credit for retaining their employees during a challenging time. It is a fully refundable credit, so you will be issued a refund for any remaining credit after you cover your tax liability.

An ERC Warning and Update from the IRS

The ERC program has been in effect for a few years now. New legislation has impacted who qualifies and how much money employers can receive for this credit. The IRS also warned employers on October 19, 2022, because of some third parties trying to take advantage of businesses. 

Some employers work with third parties when they need help claiming the ERC. Many third parties are qualified and knowledgeable about the ERC, and they end up helping businesses submit their claim promptly and get a credit that helps their business. 

Some ERC advisors are, unfortunately, illegitimate. The particular issue the IRS warned about in its announcement was the trend of some third parties advising employers that they should claim the ERC when they don’t actually qualify for the credit. They may also inaccurately compute the employer’s credit. 

These third parties are doing this because they can charge a hefty upfront fee that is contingent upon how much the refund is for the employer. They can say that the employer is eligible for a larger refund than is accurate just to get a larger payment from the employer. 

These providers often don’t disclose to their clients that the credit amount will reduce their original income tax return. They may also not let the business know that they must file an amended tax return to correct overstated wage deductions if they filed an income tax return and deducted qualified wages before claiming the credit with an employment tax return.

The IRS goes on to state that “businesses are encouraged to be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.” Unfortunately, if a business is a victim of these malicious practices, it will still be responsible for everything reported on its tax returns. The employer could have to repay the employee retention credit they received as well as any penalties or interest that come from the mistake.

This IRS update tells you just how big of an issue it is to work with a dishonest advisor to claim the ERC. Remember always to vet those you hire and do research yourself to make sure you qualify for the ERC for quarters in 2020 or 2021. Talk to a trusted ERC expert if you have further questions about eligibility or how to qualify.

Seven FAQs About Employee Retention Tax Credit Updates

You need to know exactly what has changed since the ERC was introduced in 2020 so you can claim your accurate credit right away. Here are a few frequently asked questions about ERC updates and how to ensure you’re eligible to claim the credit:

1. Was the ERC Extended Past 2020?

The ERC was initially applicable through 2020, but pandemic relief legislation extended it into 2021. Eligible employers can now claim the credit through September 30, 2021, and recovery startup businesses can claim the last quarter of 2021 as well. The ERC was not extended for 2022 or 2023.

2. Can I Get a Bigger Credit for 2021?

The government significantly increased the potential ERC employers can receive in 2021. For 2020, the maximum ERC is $5,000 per employee per year. For 2022, the maximum ERC is $7,000 per employee per quarter, so the total maximum for the year is $21,000 per employee (or $28,000 per employee for recovery startup businesses). This is because the credit was increased from 50% of qualified wages, up to $10,000 per year, to 70% of up to $10,000 per quarter in 2021.

3. Can I Claim the ERC if I Received a PPP Loan?

The initial rollout of the ERC restricted loan holders under the Paycheck Protection Program (PPP) from claiming the ERC. Subsequent legislation changed this rule, however – you can now claim the ERC if you received a PPP loan, but you cannot use the same wages that PPP funds paid for to calculate your employee retention credit.

4. Did I Lose Enough Gross Receipts to Qualify for the ERC?

ERC updates have also impacted how to measure losses in gross receipts. In 2020, businesses had to have lost at least 50% of gross receipts in a quarter compared to the same quarter in 2019. In 2021, businesses had to have lost at least 20% of gross receipts in a quarter compared to the same quarter in 2019. 

The other qualifying factor was unchanged with the law updates – you can qualify for 2020 or 2021 if you partially or fully had to close your business because of a government order.

5. Will the ERC Be Extended for 2022 or 2023?

There is no indication that the ERC will extend past its current end date of 2021. Remember that if you are eligible, however, you can still claim the ERC for 2020 or 2021. Make sure you claim the ERC right away, as you only have three years from the date you initially filed your tax return.

6. How Do I Claim the ERC Retroactively?

Any claims you can now make for the ERC are for past quarters. You will need to file an amendment to claim the ERC using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Provide all applicable information on the form and indicate which quarter you’re applying for. You will need to send the IRS a separate Form 941-X for each quarter you’re retroactively claiming the ERC

7. How Do I Avoid Fraudulent ERC Advisors?

The IRS has warned employers to watch out for third parties who lead them astray just to get paid. Being aware of these scams is the first step. You should also do your research to determine if you’re eligible for the ERC. 

Be wary of any advisor who tells you you’re eligible after you have figured out that you’re ineligible. Always ask the tax professional to provide you with any relevant certifications for their practice. Read reviews and pay attention to gut feelings that someone is being dishonest with you. 

Most importantly, avoid any payment structure where you agree to give the person a portion of your employee retention credit upfront. They could then falsely increase what you claim to get a bigger check from you.

Start the filing process as soon as you realize you’re eligible for the ERC. Remember to closely evaluate your books for the 2020 and 2021 quarters to see if your gross receipts qualify. Always talk to an experienced, legitimate tax professional if you have questions about how to claim your credit.

Contact the Trusted Team at ERC Today

The ERC presents an excellent opportunity for employers to get a credit up to $26,000 per employee in total for 2020 and 2021. Always be cautious, however, when working with third parties to help you determine your eligibility, calculate your credit, and help you through the process of claiming the credit. Do your research, only work with trusted advisors, and talk to a professional if you’re unsure what to do. 

Turn to the trusted experts at ERC Today. Our team is made up of experienced professionals from the tax and financial realms who are ready to guide you honestly and efficiently.

We offer a free consultation and minimal upfront costs, and we are 100% IRS compliant. All our reporting is completely transparent. Get your maximum ERC with the help of our reliable team.

Contact ERC Today for more information about your employee retention credit options. 

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