The Employee Retention Credit (ERC) is a payroll tax credit program that was born from the same CARES Act that created the Paycheck Protection Program (PPP). Offering up to $26,000 per employee who was retained during COVID-19, ERC refunds can be significant for small businesses. Further, ERC is a cash refund from the government with no use requirements; business owners can spend, save, or invest their ERC refund as they see fit.
Many ERC processors emerged in 2022 after new legislation widened the program’s eligibility criteria. However, not all ERC processing companies are equal. Here are four red flags for ERC processing companies that you should never ignore.
1. Your ERC estimate is too good to be true.
While ERC can result in meaningful cash back for many companies, the simple calculation outlined below can help determine if your ERC processor is properly computing your credit.
Gross Wages paid 3/13/20 to 9/30/21
- Wages used for PPP forgiveness (if applicable)
- Wages paid to owners and their family members
= Net Eligible Amount
Net Eligible Amount x 60% Estimated Blended Credit Rate = Maximum ERC Estimate
If you were provided an ERC estimate higher than your Maximum ERC Estimate, your ERC processor may not be abiding by ERC wage rules. Bypassing ERC’s wage regulations artificially inflates your ERC refund amount, which can cause you to file for more ERC than you are eligible to receive.
Ensure your ERC processor’s calculations roughly align with the simple computation. If it does not, be sure to confirm the processor’s calculation removes wages used in PPP forgiveness, deducts wages paid to owners and their family members, and incorporates the 60% credit rate wage limit in your calculation.
2. You qualify for all seven quarters (Q1 2020 through Q3 2021) of ERC without speaking to a legal professional who specializes in COVID-19 shutdown regulations.
The Maximum ERC Estimate shown above would only be valid in cases where your business was determined to be eligible for ERC for all seven quarters, comprised of four quarters in 2020 (with Q1 2020 only encompassing 3/13/20 to 3/31/20) and the first three quarters in 2021. If you qualified for fewer than seven quarters, your business’ Maximum ERC Estimate would be lower.
In 95%+ of ERC applications, without a detailed conversation with a professional focused on COVID-19 shutdown regulations, an ERC processor cannot determine if your business qualifies for all seven quarters of ERC.
When vetting an ERC processor, look for a team that analyzes your company’s pre- and post- shutdown metrics and memorializes each government-imposed shutdown that impacted your business and how your business was disrupted. This detailed work ensures your business is eligible for ERC in each quarter that you file.
3. The processor does not sign your Form 941-X as a paid preparer.
Beware any processors that do not sign your Form 941-X as a paid preparer. Form 941-X is a tax document that is filed with the IRS to claim ERC. If your ERC processor does not sign your Form 941-X, the ERC processor is not registered with the IRS and is acting as a shadow preparer. As a shadow preparer, the ERC processor can avoid any future audits or reviews of your ERC calculation. This means that you do not have the ability to request supporting documentation that shows how you qualified for ERC and the methodology used to determine your qualification if it was ever needed.
When selecting your ERC processor, seek out a company or individual who is registered with the IRS. These types of ERC processing organizations with registered personnel can support you with calculations and legal documentation if your ERC calculation is ever reviewed or audited.
4. The processor charges double fees.
If your ERC processor charges an upfront fee to determine your eligibility and a second fee to help you file for your credit, consider finding another provider. While ERC calculations are complex, determining eligibility is not intended to be a barrier to access the program. ERC is intended to support businesses, particularly smaller businesses that may need support to confirm if they qualify for the program.
Seek out an ERC processor that charges a fee that is due upon your receipt of the credit. These ERC organizations’ interests are aligned with yours; the processor is not paid until you receive your refund check from the IRS. This structure helps ensure your business qualifies for the credit, your documentation is properly submitted, and your calculation is correct.
While you should be wary of these red flags, many trustworthy organizations are available to help. ERC is a meaningful program that can help you reduce leverage and inject cash into your company if you qualify. If you are seeking cash sooner, some organizations can even help fund your ERC credit within days of filing with the IRS.
We would encourage businesses to revisit their eligibility before the program’s expiration, as 2022 legislation impacted qualifications for many small companies.
David Cody, Co-CEO of NEWITY, has focused on helping companies scale for the past 30 years. Previously the founder of Galway Advisors, Dave has spent significant time helping businesses commercialize their organizations. On a mission to create access to affordable small business loans and tax credits alongside trusted business service providers, Dave founded NEWITY.