Understanding The Employee Retention Credit.

Is it right for you?

by Tom Luby, owner of Profit Builders International

Many fence companies are enjoying hot profits for a third straight year, thanks, in part, to government bailouts like the Payroll Protection Program (PPP) and the Employee Retention Credit (ERC) during the COVID years of 2020 and 2021.

While most everyone understood and took advantage of the PPP, the ERC is one of the most misunderstood federal government rebate programs. I’ll explain some of the major points about the ERC, but please remember, when it comes to all accounting and tax questions, check with your accountant for how to apply this to your business.

The ERC is a federal payroll tax credit for payroll tax periods in 2020 and 2021, designed to help companies retain employees. It not only reduced taxes owed, but if the taxes owed are reduced to zero, the company is entitled to compensation above and beyond the original tax liability.

If your business previously filed 2020 and 2021 payroll taxes, you can retroactively claim the ERC to reduce tax debt and possibly receive a surplus credit, which can result in a cash refund. Also, if your business qualifies for all quarters, you could receive as much as $26,000 per employee.

I’m often asked, “If I’ve already filed my business’ 2020 and 2021 federal payroll taxes, can I still receive the ERC?” The answer is yes. Small businesses can apply for the ERC retroactively. Your credit will either be applied to your tax bill or result in a refund of taxes paid during the applicable quarter or other designated payroll tax periods.

Check out the IRS website at irs.gov and search for coronavirus employee retention credit to see if you qualify.

The requirements are different depending on the period for which you claim the credit. The ERC is not available to individuals. Also, beware of ERC scam promotions. Your accountant should be able to steer you in the right direction.

Anyone who improperly claims the credit must pay it back and may owe penalties and interest. The only way to claim the ERC is on a federal employment tax return.

WARNING SIGNS OF AGGRESSIVE ERC MARKETING

The ERC is a complex credit that requires careful review before applying; be wary of these scam tactics:

• Unsolicited calls, emails, or texts from someone you don’t know.
• Statements that the company can determine your ERC eligibility within minutes.
• Large upfront fees to claim the credit.
• Fees based on a percentage of the refund amount of the ERC claimed.
• Statements from the promoter that you qualify for the credit before your tax situation is reviewed.
• Statements from the promotor urging you to submit the claim because there is nothing to lose.

ELIGIBILITY

The credit is available to eligible employers that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Eligibility and credit amount vary depending on when the business impacts occurred.

Generally, businesses and tax-exempt organizations that qualify are those that:

• Were shut down by a government order due to the COVID pandemic during 2020 or the first three calendar quarters of 2021, or
• Experienced the required decline in gross receipts during the eligibility periods during 2020 or the first three calendar quarters of 2021, or
• Qualified as a recovery start up business for the third or fourth quarters of 2021.

Eligible employers must have paid qualified wages to claim the credit. They can claim the ERC on an original or adjusted employment tax return for a period within those dates.

Certain limitations apply to the ERC. For example, employers can’t claim the ERC on wages that were reported as payroll costs for PPP loan forgiveness. Qualified wages for purposes of the ERC do not include payroll costs in connection with shuttered venue operators, grants, or restaurant revitalization grants.

If you decide to apply, the process can be complicated, but your accountant should be able to walk you through the process. If you choose to use a third-party tax or law firm to process your application, remember these suggestions:

• Make sure the firm you work with is reputable.
• Be sure the refund is made payable to you and your company, not to them for second-hand disbursement.

Good luck.