Employers should be wary of third parties advising them to claim the employee retention credit when they may not qualify. Some third parties are taking improper positions related to taxpayer eligibility for and computation of the credit.
These third parties often charge hefty upfront fees or a fee contingent on the refund. They may also fail to inform taxpayers that wage deductions claimed on the business’s federal income tax return must be reduced by the amount of the credit.
Suppose the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit. In that case, the business should file an amended income tax return to correct any overstated wage deduction.
Businesses should be cautious of schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.
What is the Employee Retention Credit?
The ERC is a refundable tax credit for businesses that continued paying employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020–December 31, 2021. Eligible taxpayers can claim the ERC on an original or amended employment tax return for a period within those dates.
To be eligible for the ERC, employers must meet one of the following conditions:
- They sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 during 2020 or the first three quarters of 2021
- The business experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
- The employer qualified as a recovery startup business for the third or fourth quarters of 2021.
Only recovery startup businesses are eligible for the employee retention credit in the fourth quarter of 2021.
Eligible employers cannot claim this credit on wages reported as payroll costs to get PPP loan forgiveness or that they used to claim certain other tax credits at any time.
To report tax-related illegal activities relating to ERC claims, taxpayers should submit Form 3949-A, Information Referral They should also report instances of fraud and IRS-related phishing attempts to the Treasury Inspector General for Tax Administration by calling 800-366-4484.
Here are some resources to help employers understand eligibility requirements and how to claim this valuable credit:
- For qualified wages paid after March 12, 2020, and before January 1, 2021 – Notice 2021-20, Notice 2021-49, and Revenue Procedure 2021-33
- For qualified wages paid after December 31, 2020, and before July 1, 2021 – Notice 2021-23, Notice 2021-49, and Revenue Procedure 2021-33
- For qualified wages paid after June 30, 2021, and before October 1, 2021 – Notice 2021-49 and Revenue Procedure 2021-33
- For qualified wages paid after September 30, 2021, and before January 1, 2022 – Notice 2021-49 and Notice 2021-65
- Employee Retention Credit – 2020 vs 2021 Comparison Chart
- Form 941-X Instructions April 2022 Revision – for use with Form 941 Instructions from the relevant calendar quarter
- Form 941 Instructions December 2021 Revision
- Form 941 Instructions 2020 Revisions
- Form 943, 943-X, 944, 944-X, CT-1 and CT-1-X InstructionsSource: IRS