Employee Retention Credits – Proceed with Caution!

By Larry Shaub, CPP, CPA, Owner, AccuPay | | 10.16.23

The Cares Act was signed into law on March 27, 2020 by President Trump as a COVID relief package to help people and employers cope with financial repercussions of the pandemic. Included in The Cares Act were PPP loans and Employee Retention Tax credits. The original legislation indicated that an employer could choose either the PPP loan program or ERC tax credits, but not both. Most employers correctly opted for the PPP loan and did not claim ERC tax credits. On December 27, 2020, legislation was enacted that enabled employers to claim ERC payroll tax credits, if eligible, even though they also received one or more PPP loans. AccuPay has been researching, studying and educating their clients about possible ERC tax credits since early 2021. Every employer should review their eligibility for Employee Retention Tax Credits and claim them if eligible. Every employer should also be very cautious about ERC payroll tax credits since “free government money” has created a large number of ERC “experts” who are aggressively promoting their services to employers, some of whom are stretching the limits of ERC eligibility.

WHAT ARE THE BASIC ELIGIBILITY CRITERIA FOR ERC PAYROLL TAX CREDITS?

Employers may qualify for IRS refundable payroll tax credits IF they meet 1 of 2 primary ERC eligibility criteria, as follows:

  • Employers who have calendar quarters of "gross receipts" in 2020 and 2021 which significantly declined from the same quarters in 2019 may qualify for the ERC tax credit, based on some "math tests." The "assumption" is that if an employer's gross receipts declined significantly during 2020 and 2021 from pre-pandemic year 2019, COVID surely was part of the reason, and the employer needs government financial relief to retain employees on its payroll.
  • Employers who had normal pre-pandemic operations suspended, partially or completely, by government order(s) which restricted the employer from operating “normally” may also qualify for the ERC payroll tax credits. This ERC “qualifier” is not as "black/white" as the "math tests" based on a significant decline in gross receipts. So, employers who qualify based on government ordered suspensions/restrictions must be very careful to keep good documentation with specific restrictions and dates. A primary example of this ERC qualifying test is government ordered mandates imposed on restaurants which limited inside dining, assuming that "inside dining" was more than a "nominal component" of the restaurant's normal operations.

SEEK PROFESSIONAL GUIDANCE FROM EXPERTS IN TAX LAW/SPECIFICALLY THE ERC LEGISLATION

The IRS has since issued about 5-6 “warnings” to employers about being careful who they select to advise/help them obtain ERC tax credits. They have indicated that a large number of "ERC mills" (their language) have popped up and are aggressively contacting employers about the ERC tax credits. They are also interpreting the tax law too broadly in an effort to qualify "anybody and everybody" for the ERC program. With that said, many advertise you need at least five W-2 employees to qualify, just so they don’t have to “mess with” the smallest employers. The truth is, employers can claim a credit for a single employee if eligible.

Some of the questions you may be asked by the ERC mills include:

  • Have you been impacted by COVID? (Who hasn't?)
  • Did you have difficulty hiring employees?
  • Did you have supply chain issues?

Many of the most aggressive ERC mills will "qualify you" based on government ordered COVID “suspensions,” to include “supply chain” ordered restrictions. If your ERC "expert" tells you that you qualify based on "suspensions,” make sure they provide you with the precise government orders (state, local, etc.) with beginning and end dates, which restricted your operations. I have recently reviewed a few employer's ERC claims which include all types of COVID events (masks, cleaning, CDC guidance, social distancing, work from home, etc.), none of which rise to the level of a specific government order which restricts the employer from normal operations for a specific time frame. The "theory" must be if the consultant compiles a laundry list of COVID suspensions/events, surely the sheer weight of the list will qualify the employer for ERC tax credits. I do believe the IRS will audit a large number of ERC credit claims during the next few years. So, be careful! If it seems too good to be true…perhaps it is!

Contact your CPA firm if you are not sure if you qualify for the ERC tax credit. They can help you determine eligibility or put you in contact with an outside expert. AccuPay has worked with many accountants who make the ERC calculations and simply want us to prepare the amended payroll tax returns. We have also worked with many accountants who refer their clients to us for education and perhaps filings. You know your CPA and, I suspect, trust them to guide you correctly.

HAVE MORE QUESTIONS, LIKE TO LEARN MORE?

AccuPay has written many articles about Employee Retention Tax credits, which have been posted to our blog archive, located at our website https://accupay.com/. You can get a "general sense" of how the ERC works by reading those articles on our website. I am also happy to answer general questions about ERC eligibility and calculations, and steer you in the right direction----email me at larry@accupay.com