Claiming the Employee Retention Credit: 3 Myths and Misconceptions
While we are now three years out from the onset of the COVID-19 pandemic, we can still feel the lasting impact in many areas of our lives. Specifically for businesses, the tax credits that they were able to claim during the pandemic have had a lasting impact, for many this impact was positive, helping them keep their businesses afloat despite difficult economic times.
However, now that the worst days of the pandemic are far behind us, there is a new risk for businesses. This risk comes in the form of claiming the Employee Retention Tax Credit, businesses are able to claim this credit for previous quarters if they were eligible at that time.
If the business was eligible and didn’t claim the credit at the time, they can claim back credits, but the most important aspect of this is understanding eligibility. Businesses that are eligible for the ERC can benefit from it, however, businesses that aren’t actually eligible may face IRS penalties.
There are now a lot of myths and misconceptions about the Employee Retention Credit, in this article, we will be demystifying some of the misinformation that’s out there.
The Employee Retention Credit and Eligibility
The Employee Retention Credit (ERC) is a tax credit that was created under the CARES Act in 2020 to help businesses survive the economic downturn of the pandemic.
Businesses were able to claim this credit for qualified wages paid between March 12, 2020, and before January 1, 2022. Businesses that were eligible for the credit but never claimed it at that time may be eligible for claiming this credit now.
The IRS provides the following requirements for ERC eligibility:
- Businesses that paid employees while they were shut down/in limited operations.
- Businesses that qualified as a Recovery Startup during Q3 or Q4 of 2021.
- Businesses that had significant decreases in gross receipts between March 13, 2020, to December 31, 2021.
How can Businesses Claim the ERC for Previous Quarters?
While the tax credit is no longer available, eligible businesses can claim the credit for prior quarters. This can be done on Form 941, or by filing an amendment Form 941-X.
Form 941 is the Employer’s Quarterly Federal Tax Return, this is used by employers to report the Medicare, social security, and federal income taxes withheld from their employee’s wages. Form 941-X is an amendment form for Form 941.
Please note that Form 7200 is no longer available. This form was only used during the quarters that the ERC and other COVID-19 tax credits were available to claim in advance. The IRS has phased this form out.
Myth #1 – All Providers Offering to Help Your Business Claim the ERC are Requitable
This is by far the biggest misconception about claiming Employee Retention Credit. While there are plenty of companies that can legitimately help you with this, there are a lot of fraudsters offering this service.
You’ve probably noticed the flood of third-party providers into the market offering to help your business claim a refund with very little information or documentation required. Despite the aggressive marketing efforts of these companies, this should be a major red flag.
Another major red flag is any third-party provider that requires a large fee upfront for offering this service. Many providers that are not suitable will collect a large fee upfront and then either fail to claim the credit for your business or fail to claim this properly. If the provider is offering an advance on your refund or getting you a refund from the IRS quickly, this is yet another major red flag.
Be sure to fully vet any third-party or tax professional that you work with before providing any information about your business. The IRS provides a database to help businesses and taxpayers find a qualified tax preparer, you can check it out here.
Myth #2 – There are No Consequences for Incorrectly Claiming the ERC
This is another myth, there is a misconception that claiming this credit incorrectly won’t have any negative consequences. There is also a misconception that the IRS is so backed up with these claims that they won’t properly verify the information before processing the refund.
The IRS has become well aware of this misinformation and is actually auditing these claims heavily. This means mistakenly claiming the ERC, or allowing a third party to claim this on your behalf can have negative consequences for your business.
This is not to say that businesses are purposefully claiming a credit they are not eligible for, in reality, the Employee Retention Credit is a tricky topic, and many folks are simply confused about eligibility requirements.
Our team’s biggest tip is that if you are in doubt about your business’s eligibility, reach out to your CPA or tax preparer for professional advice. The IRS will require businesses who have filed the claim improperly to pay back their refund and charge potential penalties, so be sure to have accurate information from a requitable source before making any claims.
Myth #3 – There is a Set Timeline for Receiving an ERC Refund from the IRS
When you research the length of time it takes to receive an ERC refund from the IRS, there are a wide variety of answers, a few weeks, a few months, an entire year- so which is the correct IRS timeline? The answer to this question is that there is no set window of time for receiving an ERC refund from IRS.
The IRS has dedicated an entire page to the ERC on their website, you’ll find great information here, but no set timeline for refunds. This timeline will continue to vary, and this will continue to be a lengthy process for the IRS.
However, the IRS does provide a phone number for businesses to reach out to. If you need to check the status of your ERC refund, you should contact the IRS at 1-800-829-4933.
TaxBandits Offers a Form 941 E-filing Solution
TaxBandits is an IRS-authorized e-file provider of IRS tax forms, while we do not advise on the ERC, we do offer an easy solution for e-filing your forms with the IRS. This includes Tax Form 941, 941-PR, 941-SS, 941 Schedule R, 940, 940 Schedule-R, and more!
The TaxBandits application simplifies your e-filing process with time-saving features like,
- Built-in error checks using the IRS Business Rules
- Automatic calculations built into the filing flow
- Attachments such as 941 Schedule B, Form 8974 (Qualified Small Business Payroll Tax Credit for Increasing Research Activities), and Worksheets 1-2.
- Bulk upload options
- Multiple options for paying the IRS tax balance due.
Create your free TaxBandits account today to start managing your business’s IRS employment and payroll tax forms from one secure location.
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