Employee Retention Credit – How to Qualify and What to Watch Out for With Pop-up ERC Companies

 

Was your business fully or partially shut down during the beginning of the pandemic? Did you notice a steep decline in your gross receipts? If so, you may be eligible for a refundable tax credit as part of the Employee Retention Credit program, providing much-needed relief for thousands of small businesses and their owners.

After all, running a small business is no easy feat. You must keep up with payroll taxes, business expenses, and fluctuating customer demand. Fortunately, the government has your back with the ERC program.

You’ll need to meet specific requirements, but his quick guide will cover which expenses qualify for the ERC. We’ll also ensure you’re not caught unaware by the pitfalls of pop-ups. Let’s get started.

What Is the Employee Retention Credit?

Simply put, the ERTC is a tax credit for keeping employees. Defined more broadly, the Employee Retention Credit is a tax credit that employers can get back from the government by filing a 941x.

This credit depends on which year you claim it for. If you’re claiming it for wages paid in 2020, then you might be eligible for a credit of up to $5,000 per employee (up to $10,000 in wages per employee with a 50% credit).

If you’re claiming it for 2021 wages paid, you can receive up to $21,000 per employee (up to $10,000 in wages per employee per quarter with a 70% credit). The main point? If you qualify, you might be eligible to receive a total of $26,000 per employee if you can claim the credit for 2020 and 2021.

Who is eligible? Or better yet, can you claim it for wages paid for as long as you’ve been in business? Not so fast.

Unfortunately, the credit is only valid for wages paid after March 12th, 2020, and before September 30th, 2021 (unless you qualify as a recovery startup business, as claiming the credit for Q4 2021 is only available for RSBs). This is because a tax credit was introduced during the pandemic to help businesses retain employees.

By offering employee retainment benefits, the government hoped that the tax credits would encourage (and enable) small business owners to keep employees on their payroll to avoid even more extensive nationwide layoffs than we already saw.

Who Qualifies for the Employee Retention Credit?

Do all small business owners qualify for this and other tax credits? Each tax credit comes with unique requirements, and the ERTC is no different.

Employers that did business during 2020 and 2021, including tax-exempt organizations, can get the credit if they either:

  • Had to stop or slow down operations because of government orders because of COVID-19; or
  • Experienced a significant decrease in income during the relevant quarter (defined as a decrease of greater than 50% in any calendar quarter of 2020 as compared to the same quarter in 2019, or a decrease of more than 20% in any calendar quarter in 2021 as compared to that same quarter in 2019).

The Benefits of Employee Retainment for Small Businesses

Small businesses have faced incredible uncertainty in the past few years, and the Employee Retention Credit benefits them in numerous ways.

During the pandemic, it encouraged businesses to retain employees, even if they couldn’t operate at total capacity due to COVID-related restrictions. After the pandemic, it’s helped small business owners recuperate some of those lost but related expenses.

All in all, the tax credit incentivized small business owners to keep their employees on the payroll instead of laying them off. This ultimately benefits those who remain employed. It helps businesses that prioritized learning how to retain employees, too.

For example, employee retention strategies often help small businesses as they help reduce the cost of employee turnover. For those employing hourly workers, this can easily reach well over $1,500. Likewise, the cost of employee turnover can go up to 150% of an employee’s salary for technical positions.

How to Apply for the Employee Retention Credit

Are you ready to apply for the Employee Retention Credit (written as both ERC or ERTC)? You’re in luck, as the deadline to get a refund for wages paid in 2020 (all quarters) isn’t until 2024.

This means that if you’re trying to claim the tax credit for all quarters in which you paid wages in 2020, the deadline is technically April 15th, 2024. If you’re trying to claim the credit paid for wages in 2021, the deadline is technically April 15th, 2025 (assuming all original 941’s were filed on time).

However, to be specific, you have three years from your tax filing date to claim the credit. So, base your deadline on when you filed your business taxes.

Now, what are the steps for claiming the Employee Retention Credit? Filing for an Employee Retention Credit requires you to  file IRS Form 941-X, or the “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.”

Generally, you’ll file a separate form for each calendar quarter in which you are eligible to claim the ERC. Furthermore, it is essential to note that original Forms 941 are due by the last day of the month following the end of each quarter.

However, amendments to Form 941-X under the ERC program have more flexible requirements and more generous filing deadlines. Hence the 2024 and 2025 filing dates.

What Are Pop-Up ERC Companies?

The IRS actually issued a warning for business owners to beware of pop-up ERC companies. These companies typically make fraudulent claims and ask for upfront fees so they can file on your behalf. They’re also set up specifically for processing these types of claims.

If a business is offering to get you way more than you expected or asking for upfront fees to evaluate your business, then definitely beware.

As a general rule of thumb, never:

  • Share financial information with unknown individuals
  • Answer unsolicited calls from companies about the ERC
  • Pay an upfront fee for ERC assistance

If you’re speaking with a financial company that claims to be able to help you, ask about their services. Instead, ask them if they know what “more than nominal impact” means. That’s a great way to ensure they’re legit.

Work With Valor Payroll Solutions

At Valor Payroll Solutions, we’re dedicated to helping small businesses in the Tulsa, Oklahoma, and Northwest Arkansas area.

With over a decade of experience dealing with payroll taxes, we are experts in simplifying and navigating the complex legislation that small business owners often face.

If you’re looking for help with tax credits or the Employer Retention Credit, ensure you don’t fall victim to pop-up ERC company scams. Instead, contact us today for tailored advice.

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Christina Hageny

President - Valor Payroll Solutions

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Christina Hageny

President - Valor Payroll Solutions

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