If you are an employer, be careful about third parties that may advise you to claim the employee retention credit (ERC) when you don’t qualify. Some third parties are taking positions related to taxpayer eligibility for and computation of the credit that can’t be supported. This could spell trouble for employers that use these third parties to claim an ERC that they are not entitled to.
Many of these businesses charge large upfront fees or a fee that is contingent on the amount of the refund that you receive. They may also fail to inform you that wage deductions claimed on your business’ federal income tax return must be reduced by the amount of the credit.
If your business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.
If you are a business owner, be cautious of schemes and direct solicitations promising tax savings that are too good to be true. You are responsible for the information reported on your tax returns, so if you improperly claim the ERC you could be required to repay the credit along with penalties and interest.
What is the employee retention credit?
The ERC is a refundable tax credit for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.
To be eligible for the ERC, you must be an employer who meets one the following conditions:
- You sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021
- Your business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
- Your business qualified as a recovery startup business for the third or fourth quarters of 2021.
Only recovery startup businesses are eligible for the employee retention credit in the fourth quarter of 2021.
Eligible employers cannot claim this credit on wages reported as payroll costs to get PPP loan forgiveness or that they used to claim certain other tax credits at any time.
This article carries no official authority, and its contents should not be acted upon without professional advice. For more information about this topic, please contact our office.