Employee Retention Credit (ERC)

Updated March 19, 2024

UPDATE March 2024: No matter your ERC claim’s status, you should review your position with expert tax advisors to determine next steps.

The proposed Tax Relief for American Families and Workers Act of 2024 would end the ERC program effective January 31, 2024. The bipartisan legislation was passed by the House on January 31 and is now being considered by the Senate.

• What Is The Employee Retention Credit?
• ERC and PPP Loan Considerations
• Employee Retention Credit Comparison [INFOGRAPHIC]
• Qualifying for the Employee Retention Credit due to a Partial Suspension of Operation
• Claiming an ERC
• Pointers and Pitfalls
• Recommendation
• IRS Moratorium
• ERC Voluntary Disclosure Program
• Tax Relief for American Workers and Families Act of 2024

What Is the Employee Retention Credit?

This ERC is explicitly meant to help employers that suffer financial losses, but still continue to pay workers who are unable to perform their duties. It, like other CARES Act measures, rewards employers that keep employees on the payroll roster. This credit is available for payroll from March 12 to December 31, 2020.

The retention credit is a tax credit — not a deferral — against federal employer taxes. This credit is measured quarterly. If the credit applies, taxes are completely waived.

The Infrastructure Investment and Jobs Act, enacted on November 15, 2021, amended section 3134 of the Internal Revenue Code to limit the Employee Retention Credit only to wages paid before October 1, 2021, unless the employer is a recovery startup business.

IRS issued guidance regarding the retroactive termination of the Employee Retention Credit.

There are certain stipulations that can impact qualification such as a complete business shutdown, a decline in quarterly gross receipts meeting defined thresholds, or a partial suspension of operations due to a government order. Refer to the specific sections for more information.

ERC and PPP Loan Considerations

When the CARES Act was passed, it created both the SBA Employee Retention Credit (ERC) program and Paycheck Protection Program (PPP). They were mutually exclusive, but the Consolidated Appropriations Act (CAA), which was signed into law on December 27, 2020, significantly expanded the ERC and allows employers who borrowed PPP loan funds to take advantage of both programs.

There are several exciting developments regarding ERC which include, it’s refundable. That means you get a refund if the credit exceeds the amount of Social Security taxes withheld. It’s a dollar-for-dollar credit against employment tax. Businesses losing money may not owe much income tax, but they often employ people and incur payroll taxes. It’s instant cash relief. You can get the credit in advance of filing your quarterly payroll returns if you’re certain that you’ll qualify and the credits are big.

A close reading of these new provisions also reveals wages used for the ERC calculations take precedent over wages used in PPP math. That raises questions for taxpayers who have already filed for PPP forgiveness.

Qualifying for the Employee Retention Credit due to a Partial Suspension of Operation

There are three ways to qualify for the Employee Retention Credit (ERC). Two are relatively straightforward, and one is complex and subject to interpretation. An organization may qualify if there is

• either a 100% shut down of the operation which is directly linked to a government order,
• a decline in quarterly gross receipts meeting defined thresholds,
  or
• a “partial suspension” of operations due to a government order.

It’s the third qualifier we are concerned with: If you recently received a call or email informing you that you could get $26,000 per employee in COVID Aid, you should be wary. Each entity should have eligibility evaluated on its own merits. The process is complex, and documentation is more rigorous. Sweeping generalizations about eligibility are aggressive and unwise.

To qualify using the argument an organization was partially suspended, at some time between March 13th 2020 and September 30, 2021, the following is required:

1. A government order, which is generally a state, county or local order. Federal guidance isn’t statutory, so it’s not enough. A news article won’t suffice. Another country’s orders to its citizens is also unlikely to be relevant.
2. Evidence the business was more than nominally impacted. The IRS has indicated that more than nominal is defined as a more than 10% overall impact on either revenue or hours, as compared to the same period in 2019. Put another way, they want metric evidence that the portion of the business that was suspended by orders represented more than 10% of the business activity in the corresponding pre-pandemic period in 2019.
3. Start and end dates of relevant orders should be directly linked to evidence a portion of the business was suspended, not merely disrupted.

Interestingly, the IRS has not yet indicated what they’ll do when reviewing an ERC for an organization that does not meet the 10% safe harbor. It’s logical to assume the writers of this legislation and subsequent guidance will expect to see proof of more than nominal negative impact. Therefore, showing shut-down orders alone, unaccompanied by proof of adverse financial impacts, could be problematic in an audit where material amounts of a credit have been claimed. Organizations that did not suffer a revenue or profit decline are strongly advised to prepare evidence of the adversity experienced via an analysis of hours worked in segments of the business in 2019 that were clearly not operable during pandemic periods.

We all know that legislators and the IRS are aware of abused COVID Relief programs. The government has indicated recently that enforcement activity will commence, and it will be aggressive. As audits begin, we can expect further clarity on what is considered acceptable documentation when claiming the ERC due to a partial shut-down of operations.

For anyone excited about reading it, the IRS provides hundreds of pages of examples in Notices 2021-20, 2021-23, 2021-33, and 2021-49.

Claiming an ERC

In order to claim the new Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer's share of Social Security tax but the excess is refundable under normal procedures.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200. Taxpayers can file it more than once a quarter. However, the IRS has rejected many 7200s, and we do not always recommend an advance credit filing. Claim the credit on a Form 941, which is the federal quarterly payroll tax return. If filing after the due date, a 941-X can be filed to amend the return.

The following examples might help clarify (assuming either there is a government order or a drop in receipts to qualify):

1. A restaurant with 40 full-time staff in 2019 that is subject to a government order to partially suspend operations is eligible for the credit on all wages paid to staff, even if the staff are working and productive during the paid time. The potential credit for this small business is 40 x $5000 = $200,000 in 2020. It’s potentially 40 x $7000 x 3 = $840,000 in 2021(!).
2. A restaurant chain with more than 500 full-time workers can take the credit for staff who were paid only when they were not working, or for furloughed staff healthcare costs they continue to pay while those staff are not working. The credit doesn’t apply to wages paid to those who are working.
3. A restaurant continues to pay staff for 40 hours a week, though they only work for 20.
   1. If they have more than 500 (or 100 in 2020) workers, they can claim a credit for the 20 hours of paid, not working, time.
   2. If they have less than 500 (100 in 2020) staff, they can claim the credit for all 40 hours.

Pointers and Pitfalls

The following will help clarify or avoid pitfalls within the ERC regulations.

1. This most recent legislation allows an employer to take an ERC on the healthcare costs for a furloughed employee, even if they are not collecting wages.
2. There is complexity in defining “partial” business, or commercial, interruption.
3. Be careful. There’s room for interpretive trouble when it comes to counting full-time workers. Legislation refers to full-time staff and points to prior language indicating that full-time employees are those who worked 30 hours a week or more on average in 2019.
4. Zoom can rule out qualifying. If everyone goes home and promptly telecommutes, even if there’s a government stay-at-home order, the business has not been disrupted.
5. The CAA eliminated, at least for now, the requirement that eligible wages for an employee not be higher than they were in a prior quarter.
6. Owner wages, and any owner family wages, may have to be excluded in calculating eligible wages.
7. The ERC program was eliminated for the 4th quarter of 2021 to help fund Infrastructure legislation.

IRS Moratorium

On September 14, 2023, the IRS announced a moratorium on processing new ERC claims through at least the end of 2023 (the IRS has not set a definitive end date). The moratorium was in response to aggressive marketing scams that have arisen through TV, radio, texts, mail (ads that look like official government letters), phone calls, and social media.

The IRS is also collaborating with the Justice Department to combat fraud, safeguard against abuse and protect businesses from predatory marketing tactics.

Next steps:

• If you are an eligible business or tax-exempt organization owner, you should continue to file your ERC claim, especially if you plan to claim a refund for tax year 2020 or 2021. The due date for the refund filings has not changed. The 2020 ERC filing deadline is April 15, 2024, and the 2021 ERC filing deadline is April 15, 2025.
• If you have already filed an ERC claim, your file is still under review. If you filed your claim with a reputable CPA firm and not a contingency-based credit firm, there is no need to worry.
• If you used a firm that charged a percentage of your refund, you should have your ERC refund claims reviewed by a CPA firm. When a firm takes a portion of your refund, it creates a conflict of interest and encourages aggressive filings (a key decision factor in the moratorium).
• If you believe you may have an “aggressive” ERC claim, you can do two things:
  • Withdraw your claim if you think it is ineligible, even if it is currently under or awaiting audit. See this link for more info on how to withdraw an ERC claim.
  • Pause your ERC claim filing and ensure the accuracy and legitimacy of the claim with a reputable CPA firm.

While the IRS continues to process claims from organizations that have already filed for the ERC, the processing timeline has slowed drastically due to the complex nature of these filings and the need to prevent improper payments.

If you think you were affected by the ERC scams or need a hand reviewing your ERC filing, we are here to help. Reach out to our Employee Retention Credit experts about what to do next.

ERC Voluntary Disclosure Program

In December 2023, the IRS launched the ERC Voluntary Disclosure Program. This innovative solution allows employers who have received ERC refunds to return a portion of them and avoid penalty.

If you believe your business filed an ineligible ERC claim and you have already received funds, you have until March 22, 2024, to apply to repay a portion of the credits. This is particularly important if you worked with a contingency-based firm that may have guided you to file incorrectly.

Next steps:

• Confirm eligibility for the Voluntary Disclosure Program:
  • Are not under exam for the period(s)
  • Have not previously returned money or checks or rescinded claims
  • Are eligible for $0 (no partial claims)
  • Are not under any criminal investigation

• Employers who participate must:
  • File a specific form 15434. For 2020 refunds, a separate form must be filed that allows the IRS an extension of time to review. (Note: Those who use a professional employer organization cannot file with the IRS directly.)
  • Voluntarily pay 80% of the refund received upon submitting the application. In certain cases, the IRS may allow a payment plan if you cannot pay the 80% immediately, but that application will be subject to approval.
  • Cooperate with the IRS in supplying information promptly.
  • Sign a closing agreement with the IRS.
• The application form requires you to name the firm that helped prepare the ERC refund claim, which will help the IRS pursue credit-only firms that aggressively convinced ineligible employers to file a claim.

• Benefits of voluntary disclosure:
  • You only pay back 80% of the amount of the refund.
  • There are no penalties or interest.
  • You can keep the interest the IRS paid to you with the refund.
  • You do not have to pay tax on the ERC refund.
  • The period disclosed will not be subject to any subsequent audit.

• Penalties for employers who are audited and determined to have taken ERC refunds in error:
  • You owe the full amount of the refund, including any amount paid to a preparer, plus interest.
  • You owe civil and criminal penalties, which can amount to as much as 100% of the refund depending on how many rules were broken.
  • You have to separately pursue the firm that prepared the refund applications to try to recoup any fees paid.
  • Anyone who claims an ERC who is a corporate officer, or in a position of fiduciary trust with respect to the withholding and paying of employment taxes is personally liable.

If you already returned your ERC refund:

Employers who returned 100% of their refund before December 21, 2023, may be allowed to apply for the 20% relief. We anticipate that to get the relief the employer will need to cooperate with the IRS and disclose the credit provider who gave them bad advice.

Tax Relief for American Families and Workers Act of 2024

The proposed Tax Relief for American Families and Workers Act of 2024 would end the ERC program effective January 31, 2024, to clamp down on fraudulent payments of the COVID-era tax credit. If this tax package passes, businesses would not be able to submit ERC claims after January 31, 2024.

The bipartisan legislation was passed by the House on January 31 and next moves to the Senate for consideration.

Recommendation

Approach the ERC process methodically, using a well-coordinated team comprised of HR, payroll and tax professionals.

Navigating the ERC application process can be daunting, and you may be wondering if your business still qualifies — or if recouping funds is still even possible. But if you’re a small business owner that is ERC-eligible, you can still claim credit for revenue lost in 2021.

This ERC checklist outlines some key considerations as you determine your eligibility and apply for the credit.

If your ERC refund has not yet been received, the IRS recommends the payroll tax return amendment, Form 941X, should be amended or rescinded. There is a specific process for entirely reversing the 941X. If the refund amount was miscalculated, a new amended Form 941X must be filed.

Contact Our ERC Experts

We’re here to help! For questions or assistance with ERC, contact our tax credit experts.