Employee Retention Credit, also known as Employee Retention Tax Credit, is a refundable tax credit offered by the IRS for businesses and certain tax-exempt organizations. However, the credit is only available for qualified wages, including certain health insurance costs that are meant for employees. The credit is meant for organizations with employees who were affected during the COVID-19 pandemic.
In this article, you will learn about employee retention credit in general. Apart from that, you will also learn about the major importance of this credit and how the IRS (Internal Revenue Service) makes it work. Furthermore, we will also share with you the major benefits of employee retention credit for your business. Finally, we will discuss the ERC scam promotions and offer solutions to prevent them.
What Is Employee Retention Credit?
According to the IRS official website,
“The Employee Retention Credit (ERC) – sometimes called the Employee Retention Tax Credit or ERTC – is a refundable tax credit for businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. The requirements are different depending on the time period for which you claim the credit. The ERC is not available to individuals.”
If you are eligible for employee retention credit, you will be able to improve your company’s finances by taking advantage of the ERC. The federal government of the United States brought in the ERC with the use of the Coronavirus Aid, Relief and Economic Security (CARES) Act.
As per the act, businesses that were adversely affected due to COVID-19 are eligible to receive monetary refunds from the IRS for retaining employees during 2020 and 2021.
Importance Of Employee Retention Credit
According to Forbes.com,
“Not only can the ERC potentially benefit you financially in the short term through you receiving a check, but it can also help your company in the long term by allowing you to reinvest the capital and hire new workers as needed. Whether you’re a business owner or just someone looking to help businesses financially, it is crucial to stay up to date on government grants you may be eligible for.”
If a given business kept its employees on payroll during the high time of the COVID-19 pandemic, the business is eligible to receive the ERC from the IRS. However, the eligibility is a little bit more complicated. If you want to check your eligibility, we recommend you discuss your situation with a tax specialist or a professional accountant.
What Are The Benefits Of Employee Retention Credit?
Here are some of the major features of the ERC that will benefit businesses:
- Businesses that are eligible for the ERC will receive a tax credit of up to $26,000 per employee if they paid wages between 13th March 2020 and 31st December 2021. This will help the business in covering the costs of payroll during the pandemic era.
- Businesses can use the ERC not only for payroll costs but for any other business expenses. This is not possible with another program of the pandemic era, the Paycheck Protection Program (PPP), which allows protection for only payroll costs.
- A business that did not qualify for the ERC in 2020 can still be eligible for the same in 2021 and receive financial support from the IRS.
- The refundability of the ERC is a great relief for businesses. It makes a business eligible for tax refunds even if they owe no taxes to the IRS. This helps the business to receive additional cash flow so that they can invest in growth.
ERC Scam Promotions: How Can You Prevent Them?
In recent times, especially after the pandemic, there has been a rise in many scam advertisements that advise employers to claim ERC from the IRS. They advise them to “apply” for money, even when they are not qualified to receive ERC from the IRS.
In this case, the IRS warns –
“As a reminder, anyone who improperly claims the credit has to pay it back and may owe penalties and interest. The only way to claim the ERC is on a federal employment tax return. The ads are all over the radio, TV, and social media. You may even get ads that look like official government letters, or texts, emails, and phone calls advertising ERC eligibility.”
The employee retention credit is a complex form of credit system. Hence, one needs to carefully review the eligibility for the ERC before applying for an ERC claim. The following are some of the major disturbances of which one needs to be aware:
- Receiving calls, emails, texts, and ads from unknown numbers or emails.
- Claims that the company can determine your eligibility for the ERC within a few minutes.
- Asking for a large upfront fee before you can claim your ERC credit.
- In case the company or the tax preparer is asking for a fee based on a percentage of the ERC amount you are claiming, you should always avoid such people. A tax preparer cannot base fees on a refund amount.
- The company states that you have already qualified for the employee retention credit without even discussing your tax situation with you.
- In some cases, those scamming companies can also urge you to submit your ERC claim since there is nothing to lose in this regard. However, in some cases, if you improperly receive an ERC due to a false claim, you will have to repay the credit back to the IRS. Furthermore, there are added penalties and interests as well.
Hope this article was helpful for you in getting a better idea of employee retention credit and its usefulness. Businesses that qualify for the ERC can only claim for the same. Before claiming the ERC, businesses must check their eligibility. Furthermore, there are other things to consider, like the laws that impact eligibility and the potential credit due to the business.
If you want to check whether you are eligible for employee retention credit or not, you must discuss your situation with a tax specialist, accountant, or payroll specialist. Do you have any recommendations regarding ERC claims? Share your ideas and opinions with us in the comments section below.