In the post-pandemic era, small and medium-sized businesses continue to address the aftermath. Our government has offered various avenues for recovery, and the ins and outs, technicalities, and jargon can often feel quite cumbersome. If I weren’t in the industry, I would probably also experience the overwhelm of navigating programs like Employee Retention Credit (ERC).
There are endless preconceived notions about ERC that steer businesses away from receiving the compensation they deserve. Many tax advisors lack specialized knowledge, especially when it comes to more recent programs like ERC. When I meet with new clients, I am saddened to hear that they have been so misled. The pandemic was terribly difficult for businesses, and everyone wants to get past ever thinking about 2020. Because I kept hearing the same misconceptions, I put together a handy document that I like to share with clients to clear the muddy waters once and for all.
What is ERC?
Established through the CARES Act of 2020, the ERC was created to reward eligible employers for retaining employees. Following the passing of the ERC, the eligibility period was extended, as was the collectible dollar amount. Today, businesses are still entitled to claim ERC, and in some cases, the credit is worth up to $26,000. This makes ERC extremely enticing and, unfortunately, a hotbed for dishonest scams that are relatively fringe yet seem to have crowded the space.
Was the ERC program canceled?
No! In September 2023, the IRS paused Employee Retention Credit reviews; however, this has not changed anything. The IRS stated that they will accept new claims, but they will not be processed prior to the new year. Due to the extreme effects of the pandemic, the IRS is backlogged with 600,000 claims! They need some time to get caught up. Rest assured, ERC is not over or closed; it is simply on pause. Recently, the IRS Commissioner revealed that approximately 20,000 ERC claims were rejected, as they did not fall within the legal parameters. They are taking a closer look at the claims submitted and expressed the importance of using an Employee Retention Credit expert to help with the complexities of the ERC claim process.
Employee Retention Credit Myths: Busted
Myth #1: “I made money during the pandemic, so I don’t qualify.”
Business owners who made money during the pandemic were the first to think they were unqualified for ERC. This is a total myth. Under the CARES Act, 2021-20, two tests determine the eligibility of businesses for ERC. The first asks whether the business experienced a full or partial suspension of operations (FPSO) due to COVID-19 orders from a governmental authority suffering a nominal disruption. Whether a business did or did not make money during the pandemic has no bearing on this particular eligibility path or test. The second test considers whether the employer experienced a decline in gross receipts, also known as Significant Decline in Gross Receipts (SDGR). If you made money, you still may qualify.
Myth #2: “I took the Paycheck Protection Program, so I can’t apply.”
The PPP Simplification Act of 2021 established PPP loan forgiveness; however, before the Forgiveness Act, there was the stipulation that businesses couldn’t file for both the PPP and the ERC. This is no longer the case, which is fabulous news. Businesses qualify for the ERC because the PPP is deducted from the complex computation. Businesses seldom know that taking a PPP likely qualifies them for an ERC.
Myth #3: “I missed the deadline.”
One of the main things that discourages people from filing for the ERC is when their trusted advisors tell them they missed the deadline. This is a relatively common misconception with massive implications for businesses. Your business did not miss the deadline, which is true per the most recent IRS announcement in September. The Statute of Limitations states that companies have until April 15th, 2024, to file for the 2020 941 Amendment and until April 15, 2025, to file for their 2021 941 Amendment to get the most out of their ERC Tax Refund. Remember, that much of the misinformation regarding the ERC program is attributable to rogue players who have intentionally confused the public. Be sure to seek expert advice, as the IRS has not announced an end to the program.
Myth #4: “It costs too much and takes too much time.”
Many startup ERC companies charge as much as 40% of the Tax Refund, which does, in fact, become very costly for the business! It is unfortunate when businesses are charged such hefty fees, especially when there are upfront costs with no guarantees. Look for a tax advisor that has a more reasonable payment structure that does not suck you dry; there should not be bills hanging over your head, especially as you navigate the ERC. There are cost-effective advisors that your business can partner with to both help you make the most of your ERC journey and not further complicate your financial status.
A business owner should only have to submit required documents and meet with their ERC advisor a few times for clarity and signatures; the rest of the work is up to the exerts. At most a business owner may spend 6 to 8 hours in total; the return on the time invested is well worth it.
Myth #5: “The ERC prompts an audit.”
Filing an ERC does not necessarily mean that you will be audited. In order to complete the ERC, the 941x amendment to the business taxes needs to be prepared. This reduces the current quarter’s taxes and requests a refund of excess taxes from the prior quarter; however, it is not actually a full-blown audit. The technical term is an “inquiry,” simply asking businesses to provide the IRS with their work. Look for a tax compliant company that can help support this process to make you as successful as possible.
These five myths are among the most common. It is extremely important that these myths are dispelled because many businesses are entitled to apply for ERC and simply do not have the necessary guidance or education to guide them seamlessly through the process. Remember that the ERC, established through the CARES Act of 2020, continues to be a valuable resource for eligible employers. The program is not canceled but rather temporarily on hold. It’s imperative that we are all wary of the misconceptions around ERC because the pandemic challenged many businesses, and it is time to finally move past the ramifications of COVID-19.
Amber Kellogg is the AVP Client Management at Occams Advisory