Employee Retention Tax Credit Overview
In this section of TaxBuzz Guides, you will find a complete overview of the Employee Retention Tax Credit (ERTC). Learn how you can claim this credit and what qualifications you need to meet.
Read First
This credit is only available for 2020 and 2021 tax years. It is a payroll tax credit and NOT an income tax credit. Where the credit was not originally claimed, and the employer was qualified, the payroll return can be amended using 941-X and the tax return amended to adjust the payroll expense used for the credit instead of a deduction.
Overview
Eligible Employers:
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Business operations curtailed, OR
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Decline in gross receipts
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2020 - Significant decline in grossreceipts (50%), become ineligible once receipts return to 80% or more.
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2021 – gross receipts declined 20% compared to same quarter in 2019 and ineligibility when gross receipts recover to 80% not applicable. See details for optional comparatives and special rules for Q3 and Q4 2021.
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Effective: Wages after March 12, 2020, and before January 1, 2022 (as extended by the ARPA) but limited for 4th Quarter 2021 to only Recovery Start-up Businesses by IIJA.
Credit Amount:
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2020 - 50% of qualified wages not exceeding $10,000 per employee for all quarters.
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2021 - 70% of qualified wages up to $10,000 per employee for any quarter 1/1/21 through 9/30/21 or 12/31/21 for Recovery Start-Ups
Maximum Credit:
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Pre-2021 - $5,000 per employee
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2021 - $7,000 per quarter 1, 2 and 3 per employee, but “recovery start-up businesses” limited to $50,000 credit per quarter for Q3 and Q4.
PPP Loan: CARES Act said employer with a PPP loan is ineligible for this credit – this limitation was eliminated by the TCDTRA, but the same wages can’t be used for both the credit and PPP loan forgiveness.
Related IRC and IRS Publications and Forms
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CARES Act Sec 2301
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Taxpayer Certainty and Disaster Relief Act Sections 206 and 207.
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ARPA Sec 9651
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IIJA Sec 80604
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Form 941 – Employer’s Quarterly Tax Return
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Form 8655 – Reporting Agent Authorization
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Form 7200 – Advance Payment of Employer Credits Due to COVID-19
Credit Claim Withdrawal
The IRS has created a withdrawal option to help small business owners and others who were pressured or misled by ERC marketers or promoters into filing ineligible claims. Claims that are withdrawn will be treated as if they were never filed.
As part of the Consolidated Appropriations Act, 2021, “clarifications and technical improvements” were made to the CARES Act-created Employee Retention Credit (commonly abbreviated as ERC), along with an “extension and modification” of the credit (Sections 206 and 207, respectively, of the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) of 2020 portion of the Appropriations Act). Additional revisions and extensions were made by the American Rescue Plan Act (ARPA).
Breaking News - June 20, 2024
The IRS Updated Their Position Related to Denying or Paying ERC Claims.
The Internal Revenue Service (IRS) announced on June 20, 2024, significant updates regarding the processing of Employee Retention Credit (ERC) claims, as detailed in IR-2024-169. This announcement is crucial for tax preparers who are guiding their clients through the complexities of ERC claims. The IRS's new approach involves denying tens of thousands of high-risk claims while resuming the processing of low-risk claims. This article aims to provide tax preparers with a comprehensive understanding of the IRS's current position, the criteria for claim denial and processing, the timeline for refunds, and the availability of the voluntary withdrawal program.
Understanding the IRS's Current Position - The IRS has undertaken a detailed review to protect taxpayers and small businesses from improper ERC claims. This review has revealed that a significant number of claims are at high risk of being improper. As a result, the IRS plans to deny these high-risk claims while focusing on processing lower-risk claims to ensure that eligible taxpayers receive their refunds.
High-Risk Claims: Criteria for Denial - The IRS's review identified that between 10% and 20% of ERC claims fall into the highest risk category. These claims exhibit clear signs of being erroneous and fall outside the guidelines established by Congress. The IRS has flagged these claims for denial in the coming weeks. High-risk indicators include:
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Inconsistent or Incomplete Documentation: Claims lacking proper documentation or with inconsistencies in the provided information.
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Excessive Claim Amounts: Claims that significantly exceed the expected amount based on the number of employees and wages paid.
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Non-Compliance with Eligibility Criteria: Claims from businesses that do not meet the eligibility requirements set forth by the ERC guidelines.
Tax preparers should advise their clients to review their claims for these red flags and prepare for potential denial if any of these indicators are present.
Low-Risk Claims: Criteria for Processing - On the other end of the spectrum, the IRS has identified that between 10% and 20% of ERC claims show a low risk of being improper. These claims do not exhibit any eligibility warning signs and were received prior to the moratorium announced last fall. The IRS will begin processing these low risk claims judiciously, with the first payments expected to go out later this summer. However, it is important to note that the processing pace will be significantly slower than during the pandemic period due to the need for increased scrutiny.
Timeline for Refunds - For low-risk claims, the IRS anticipates that some of the first payments will be issued later this summer. However, the overall processing time will be slower than in previous periods. The IRS has emphasized that taxpayers with claims do not need to take any action at this point and should await further notification. Tax preparers should inform their clients to be patient and not to call IRS toll-free lines, as additional information on these claims is generally not available during the ongoing processing work. Generally, the IRS will work on the oldest claims first, but no claims received after September 14, 2023, when the IRS’s moratorium on processing claims began, will be processed at this time.