Understanding The Employee Retention Credit

Employee Retention Credit

Employee Retention Credit Alert! Are you flooded with numerous calls and messages that hint you’re missing out on major financial stimuli? Well, the Employee Retention Credit (ERC) might be what they’re alluding to. Dive into our comprehensive guide, where we break down the complexities of ERC, the latest IRS announcements, how to evaluate eligibility and address the marketing frenzy around it. Navigate this sea of information with our insights and get answers to why it’s suddenly become a hot topic. Make informed decisions and possibly benefit from this financial provision.

You know what I’m talking about…The Employer Retention (Tax) Credit (ERC or ERTC).

Let’s face it…You have likely heard of the Employee Retention Credit by now! Owners and staff have become HOUNDED with constant emails, phone calls, text messages, and even mailers. If you have not heard about ERC, I give the background and history below.

But I want to explain the marketing firestorm, some IRS notices, and why it is all happening.

 

Table of Contents

IRS Announcement

Employee Retention Credit: Marketing Explosion – The Who and the Why

So, What Should I Do?

Understanding the Employee Retention Credit (ERC)

Evaluating Eligibility

Employee Retention Credit: Misconceptions and Things to Keep in Mind

Reduction in Revenue is NOT Required

Told I Don’t Qualify

Fear of Audits and Other Warnings

Conclusion

 

IRS Announcement

If there wasn’t enough confusion with ERC, the IRS came out with an announcement changing the game. If you have not heard, the IRS is implementing new safety measures to address fraud concerns. They will stop processing new ERC claims until 2024 but will continue processing filings that were received before the announcement.

I have mixed feelings about the IRS Announcement. Yes, the protections against fraud are well overdue! However, many problems exist because they do not require proof when filing, and the CPA community created this void but is NOT helping their clients with ERC.

I drafted this blog post before the IRS announcement and the elements I talk about address their concerns and the causes.

 

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Employee Retention Credit: Marketing Explosion – The Who and the Why

Why are you being inundated with outreach, and who the hell are these people? Well…the answer is both simple and complicated.

ERC is a payroll tax credit, so the IRS thought CPAs would handle this. However, CPAs were burned out by PPP and EIDL, and many did not want to disrupt their standard business practices for ERC. Many CPAs do not address ERC unless you qualify for a financial reduction. The subjectivity of the rules, the constant changes/updates, and the requirement to learn something new for a short period…it wasn’t worth it for most CPAs unless they wanted to launch a business line around it.

So, I understand why they have not gotten into ERC. However, their willingness to handle it has created a void. All kinds of businesses stepped in to fill the gap, and CPAs often contradict even reputable companies, even though they have not filed any ERC claims.

My firm has four different CPA firms and accountants sending clients to us.

However, this created a vacuum.

Who came in? Pop-up payroll companies created just for the marketing and filing of ERC. And they have built their business on affiliate marketing. This means any individual or company can create a marketing company for ERC to send their leads to a filing mill. 99% of the people who are contacting you do not do any filing for ERC NOR. Will you be contracting with them? That is why you are being inundated. It’s like the wild, wild west! And it’s almost all marketing.

It is essential to point out that not all mills are equal; some affiliates are more knowledgeable. But it’s created a wild, wild west situation. And it is very tough for businesses/owners to know who to trust and who to work with.

The U.S. government has continually expanded who and how companies can qualify. You have this unique program that can help your business being offered through the IRS that is saying people should apply but telling businesses to work with a group of people who are not routinely and proactively helping clients with ERC and warning them against working with the people who are! It’s created a challenging environment.

How can business owners or anyone in business operations know what to do?

So, What Should I Do?

When analyzing the hundreds of calls and texts you are getting and shopping employee retention credit around, here are some things to keep in mind:

  • Is the person or company you’ve been talking to a party to the filing contract?
  • Is a CPA or Enrolled Agent (an IRS certification for tax filers) looking at your file and party to the contract?
  • Is the company explaining the nuances of the qualifications and helping to relate them to your business or just forwarding a form?
  • Was the company created just for ERC, and will it be gone when ERC is gone? If so, how do they handle audit protection?
  • Are they performing the financial reduction analysis for you? (There’s a lot of nuance here.)
  • Is the filing company covering ALL aspects that can increase your credit, such as healthcare? (Many created streamlined processes that leave some parts out.)
  • Is there a guarantee on the filing companies’ work? I understand the companies are responsible as they must state how they were affected by COVID, but the filing company should stand by their work based on what the company has provided.

Many of these points are covered by the IRS in their announcement.

Trust your gut in the end! Don’t work with them if something seems off about a filing company or marketing. Again, make sure that they have some credentials. Work with a reputable company that has existed before and after ERC. You should be in good hands if you can check the box on these and the points above!

Understanding the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) was introduced as part of the CARES Act, which was signed into law on March 27, 2020. The primary goal of the ERC is to encourage eligible employers to retain their employees by providing them with a tax credit for wages paid to their employees.

Initially, the ERC was set to expire at the end of 2020, but it was extended through December 31, 2021, to cover wages paid up to that date for eligible businesses. Most wage payments by qualified companies ceased to be suitable for the ERC on September 30, 2021. However, eligible companies can still claim for wages paid during that period.

Any company (for-profit or non-profit) that experienced a full or partial suspension of operations due to COVID-19 or a significant decline in gross receipts qualifies for this credit. It also extends to businesses eligible as recovery start-up businesses during the latter half of 2021.

The ERC is a refundable credit, which means that if the amount of the credit exceeds the employer’s tax liability, the excess can be refunded. This can provide a much-needed infusion of cash for eligible businesses or business operations, helping to improve their cash flow and financial stability.

Evaluating Eligibility

Before you get too far imagining everything your team will accomplish with the ERC, it’s essential to understand how much you can qualify for, if anything.

The good news is most businesses will fit within the criteria. Here are some things you should be able to show.

  • Decreased Business / Shutdowns Your business must have experienced a decline in gross receipts during the timeframe or been subject to a government order that partially or fully suspended operations during the pandemic.
  • Operational Status You need to have had employees on your payroll during the period you’re applying for
  • Qualified Wages – Each period has a specific amount of eligible wages that the credit can cover. It’s essential to look at that particular timeframe and go from there.

Because the legislation surrounding the ERC is complex and evolving, work with someone who understands the nuances of the rules and can relate them directly to your business.

Remember: certain start-ups that operated in the latter half of 2021 could also qualify, so even if your company started after the pandemic, you may have tax credits.

Employee Retention Credit: Misconceptions and Things to Keep in Mind

Reduction in Revenue is NOT Required

This is the most common misconception regarding ERC, including how CPAs advise their client. Reduction in revenue is one of 4 ways to qualify. An ERC is not all or none, so you don’t need to prepare each way.

Even when looking at a reduction in revenue, it is often done incorrectly. Many look at their annual income, which differs from the required calculation. That is why you need to work with a company that knows the ins and outs.

Told I Don’t Qualify

When you are told you do not qualify, you must ask the person, “How many companies have you helped file for?” The answer is often none or very few. This includes CPAs, unfortunately. People advise on employee retention credit qualifications without handling and filing for ERC.

We have discussed why CPAs are not handling ERC, but they are also being either very conservative (and maybe they should be) or sometimes just giving incorrect advice.

Work with a company offering a free consultation and get to know your business!

Fear of Audits and Other Warnings

There is a lot of fear about audits. Again, many by CPAs. But the IRS is certainly doing its warnings about audits. But the IRS has also warned against scare tactics of audits to market your services or encouraging people not to file if they qualify.

And, of course, you should take the process seriously, ensure you understand the qualifications and only file for what you believe you can reasonably justify.

But about the audits…Will you be audited? What will be audited? The TRUTH is no one knows yet. ERC is still new, and the IRS has five years to audit. None of our clients have been audited, and none of our accountants or anyone in our ERC network have reported audits.

Does that mean you can bank on not having an audit? Of course not.

Many experts believe that audits are not likely for credits under $2mm. Additionally, they think that audits will focus on the following:

  • Flat-out fraud – making up payroll, 941s, etc.
  • Aggregate business factors
  • Owner/family being counted as eligible employees.
  • Factoring in PPP wages

O, companies must understand the rules and be genuine and diligent in choosing qualifying quarters. Ensure a CPA or enrolled agent handling ERC is involved in the process at some point – even if not YOUR CPA.

ERC can provide some much-needed funds to businesses. It is certainly worth a look or a second look. You can contact us for a free consultation at info@think-lateral.com and mention this blog.

Conclusion

The uncertainty, confusion, and even frustration around ERC are warranted and understandable. Ultimately, companies with reasonable, good-faith rationale to qualify for ERC under the rules should be applying for ERC. I know it can be scary, but if you act genuinely, you should not let the fear of an audit or having an advisor who does not handle ERC say you don’t qualify stop you from thoroughly researching ERC, finding a reputable company, and looking into ERC.

At this point, we have helped over 300 companies with ERC and are at nearly $50 million in credits coming back to businesses. We work with reputable accountants to ensure our clients are on the best footing for ERC filing.

Employee Retention Credit is undoubtedly worth a look or a second look. You can contact us for a free consultation at info@think-lateral.com and mention this blog.

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