Employee Retention Credits: A business-saver — or a scam? Here’s how to determine eligibility

You can’t listen to the radio, watch television or scroll your social media feed without an ad about how businesses can earn $26,000 per employee through the Employee Retention Credit. The sales pitch by these third parties have become so prevalent — and concerning — that the Internal Revenue Service has listed ERC promotions as one of its Dirty Dozen tax scams.

Third-party ERC companies and their marketing tactics were called out for potentially providing “inaccurate information related to eligibility for and computation of the credit,” according to the IRS. Improper submission of ERC forms can lead to significant penalties for business owners. At minimum, it can be a 20% accuracy-related penalty. The most egregious acts can be deemed criminal fraud, leading to potential imprisonment.

Business owners must determine if they are eligible and avoid such penalties. Here are three considerations about the ERC — and those third parties — to receive the proper tax credit.

Are you ERC eligible?

Businesses that continued to pay employees during COVID-19-mandated shutdowns or had significant declines in gross receipts from March 13, 2020, to Sept. 30, 2021, are ERC eligible. The Infrastructure Investment and Jobs Act ended the ERC for wages paid after Sept. 30, 2021, for many employers. The lone exception is recovery startup businesses, who can claim the ERC on wages paid through Dec. 31, 2021.

Paying employees during the designated timeframe doesn’t guarantee $26,000 for each worker. It may be less. The combined total of wages paid and health care expenses will determine the actual per-employee compensation a business receives.

Third-party warning signs

Beware of claims that a third party is an ERC specialist. It is especially true if said third party bills an upfront fee or charges an amount contingent on the refund your company receives. Other warning signs include:

  • Offers to file without asking your business to print payroll reports;
  • Refund amounts exceed a company’s total payroll.

PPP funds don’t exclude you

The CARES Act gave support through Paycheck Protection Program loans, but limited employers from applying for the ERC. A 2021 legislation change allowed companies to be eligible for both programs. The ERC, however, cannot be used on wages already covered under the PPP.

The best advice is to confer with your trusted tax adviser.

No one will know your company’s finances and eligibility better than your existing tax adviser. For example, if your business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, it is recommended that an amended income tax return be done to correct any overstated wage deduction. A third party will not know if this needs to be done, let alone how to do it.

Open and regular communication is critical to effectively wading through all the information about the ERC and ensure you receive the maximum credit allowed by law.

Gina Perrone is a senior tax manager at Sax LLP.