The pandemic’s economic impacts are undeniable. Small and midsized businesses (SMBs) underwent significant issues. Almost a quarter of them reported large negative effects, and over 10% said they reduced employment.
The federal government stepped in with one of its most substantial stimulus programs, offering a generous tax credit under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
The Employee Retention Credit (ERC), or the Employee Retention Tax Credit (ERTC), allows eligible companies and nonprofit organizations to receive a refundable tax credit for certain payroll expenses during the pandemic.
The maximum credit per qualifying employee is $5,000 each for 2020. Additional legislative changes raised the credits to $7,000 per quarter per employee for the first three quarters of 2021. That’s a total of up to $26,000 per eligible employee during this time frame.
Anyone interested in applying for the ERC or already using it to fund their payroll should be aware of a recent announcement from the IRS Commissioner. This bulletin, IR-2023-169, imposed an immediate moratorium on all new claims through the end of 2023. Current payments will continue but may take longer to go through due to increased compliance reviews.
While this announcement may raise some immediate concerns for companies using the credit, the ultimate goal is to protect small businesses and those who will need the credit in the future. The current system has seen many cases of fraudulent claims taking away from those who deserve the funds and scamming honest businesses into making improper claims. This influx of questionable claims makes the approval process even more time-consuming, slowing down the entire tax system.
The new process, set to start in January 2024, will implement stricter compliance reviews from the start and will take approximately 180 days instead of the current 90-day period. Other new initiatives will help businesses that fall victim to aggressive promoters recover from the damage and prevent it from happening in the first place through application withdrawal options.
Generally speaking, a company or tax-exempt organization may be eligible if it meets any of the following:
To apply for the ERC, the employer must have paid qualified wages between March 12, 2020, and December 31, 2021.
It’s important to keep in mind that:
The actual credit amount will vary based on numerous factors, including the timing and nature of the business impact. Those who received money or loan forgiveness under the Paycheck Protection Program (PPP) may also see eligibility or credit amount adjustments.
According to the Internal Revenue Service (IRS), qualified wages typically exclude payroll expenses associated with shuttered-venue grants or restaurant revitalization incentives. Consulting an experienced tax professional can help you determine your eligibility and potential credit.
Eligible employers can use the credit to reduce their payroll tax due. Doing so helps offset the financial burden of taxes for companies that retained employees and continued paying wages despite a challenging business environment in 2020 and 2021.
If your organization is eligible but has yet to claim the credit, you must file amended tax information with the IRS. Different forms exist based on factors like your filing period and employer type. A Polston Tax Resolution & Accounting tax professional will help you navigate the process.
There are several factors to consider when claiming the ERC and weighing its effects on your tax return.
The ERC is a refundable tax credit, qualifying it as nontaxable income under the Internal Revenue Code (IRC). As a result, you do not add any eligible amounts your business receives to your company’s income when you or your tax professional calculate it.
Businesses that qualify for and receive the ERC must readjust their deduction for payroll expenses for any quarter involved.
For example, imagine your company reported $100,000 of deductible payroll expenses for an eligible quarter in 2021. If you had three qualifying employees in the first quarter, you could receive up to $21,000 in tax credits. You or your tax professional must then file an amended quarterly return with the IRS that reduces the $100,000 deduction by the $21,000 credit. Doing so will adjust your eligible payroll-related expenses for the quarter to $79,000.
As a result of the modification, your business’s total income for the quarter will likely also change. Any increase in that amount may be subject to taxation. If so, your organization may have to pay any additional tax obligations due for the quarter when it files the amended return. You’ll typically need to send this extra money before receiving the refund credit. Due to long processing times, this expense can affect your company’s cash flow for several weeks or months.
A tax professional can help determine the unique impacts of your business’s ERC receipts and income adjustments.
Those who qualify for and claim the ERC can choose their preferred payment method — direct deposit to their company bank account or physical check.
It’s worth noting that each Form 941-X you or your tax professional filed is processed separately by the IRS and in the order received. The agency is also working diligently to prevent fraudulent claims, which has further extended processing time.
Due to these circumstances and IRS staffing shortages, you should expect separate per-quarter payments, and processing delays may occur. As of August 2023, the IRS still had a backlog of 556,000 Forms 941-X to review. Employers can confirm receipt and potentially check their refund status by calling the IRS at 800-829-4933. You can also ask your tax professional to inquire on your behalf.
When applying for ERC credit, small businesses are especially vulnerable to the aggressive tactics of fly-by-night promoters looking to make quick cash and leave a business to deal with the fallout. However, applying on your own can be equally harmful if you do not fill out the forms exactly how they should be. If the ERC is the right choice for your business, start by getting a risk assessment from a reputable firm and letting them guide you through the application process.
While the IRS accepts submissions, it will not process new applications until January 2024. Despite this delay, now is the perfect time to apply for the ERC. By applying now, your application will be in front of the forms of those who wait until the start of the year to send theirs in.
Also, the new application process will take longer and require more preparation, so preparing your submission now gives you more time to review it with a professional and prevent denial or fraud charges based on improper filing.
Changes to the ERC process mean the IRS is looking more closely at those who have previously received credits. Some businesses applied for credits at the encouragement of scammers and promoters under fraudulent circumstances. Even those with a legal right to the credit could be required to pay back the money they received if the application was completed incorrectly.
The IRS could review past submissions with an audit and request payment back. Audits can be triggered by various circumstances, including:
A professional audit can uncover any issues with your ERC application. After an audit, our team can refile so you can keep the credit you received. Proactively seeking an audit will provide better results than waiting for the IRS to audit past applications and find a problem. If they require repayment, they will also require interest.
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The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), will unveil some major changes at the start of 2024. Starting in September of 2023, the IRS Commissioner placed a moratorium on new ERC applications through the end of the year, giving the IRS time to update its guidelines and develop a new...
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