The Employee Retention Credit (ERC) was introduced in 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and has been a popular, yet confusing, tax credit that has evolved because of the pandemic.

ERC has been retroactively updated and amended several times since it began, causing so many gray areas. Most employers are often not sure about their eligibility for the ERC credit.

Eight of the Most Common Misconceptions:

1. Myth:You can’t claim the ERC if you received a Paycheck Protection Program (PPP) loan.
   Fact: This was true initially, but later legislation (the Consolidated Appropriations Act, 2021) retroactively changed the law. Businesses can claim both, but they cannot use the same wages to qualify for PPP loan forgiveness and the ERC (no “double-dipping”).

2. Myth:Only businesses that had a complete shutdown of operations are eligible.
   Fact: A business can qualify if it was subject to a full or partial suspension of operations due to a government order limiting commerce, travel, or group meetings.

3. Myth: Essential businesses are automatically ineligible. Fact: Even an essential business may qualify if it experienced a significant decline in gross receipts or if a government order (federal, state, or local) partially suspended some of its operations, such as having reduced hours, supply chain disruptions, or limits on capacity that had a more than nominal effect.

4. Myth: The required reduction in gross receipts is a 50% drop. Fact: For 2020, the required decline was a drop in gross receipts below 50% of the same calendar quarter in 2019. However, for 2021, the required decline was reduced to 20% of the same calendar quarter in 2019.

5. Myth: Wages paid to family members or majority owners qualify. Fact: Wages paid to a majority owner (more than 50% interest) of the business, or certain individuals related to that majority owner, generally do not count as qualified wages for the credit. This is a common mistake for family-owned businesses.

6. Myth: If your business grew, you wouldn’t be eligible. Fact: Business growth does not automatically disqualify an employer. If a business grew but still experienced a full or partial suspension of operations due to a government order that caused a more than nominal impact, it may still have qualified for the credit.

7. Myth: The credit is only for businesses with 500 or fewer employees. Fact: The rules on the maximum number of employees differ between 2020 and 2021, and they determine which wages qualify.

   In 2020, “large employers” (more than 100 average full-time employees in 2019) could only claim the credit for wages paid to employees who were not providing services.

   In 2021, the threshold for a “large employer” was raised to more than 500 average full-time employees in 2019, with the same limitation on claiming wages paid for not providing services.

   Smaller employers can claim credit for all employee wages.

8. Myth: The credit has expired, or the IRS has stopped processing claims. Fact: While the eligibility period ended in late 2021, eligible employers can still file retroactively. The IRS implemented a moratorium on processing new claims due to a backlog and concerns about fraudulent claims.

   It also has programs (like the Withdrawal Program) for businesses to correct incorrect claims. The ability to file original or amended returns for certain periods is also subject to statutory deadlines.

Employers can retroactively claim the employee retention credit. If an employer didn’t claim the ERC for 2020 or 2021 on a quarterly payroll tax return, it can file an amended return for each quarter missed. To file an amended return, you can use either  Form 943X or Form 944-X  to claim the credits.

Consult a Business Tax Credit Professional

Given the complexity and the high level of IRS scrutiny due to rampant incorrect claims, it is critical to consult a trusted tax professional when determining eligibility and calculating the credit. Tax Credit Group will review your situation and sort through the confusion to help you make the best decision.

Please contact us to complete the form to receive free complimentary analysis.