Update: As of September 14, 2023, the IRS has announced a moratorium on the processing of all new Employee Retention Credit claims until at least 2024. For more information, visit IRS.gov
The Employee Retention Credit (ERC), a provision of the Coronavirus Aid, Relief and Economic Security (CARES) Act, was designed in an effort to keep employees on payroll throughout the COVID-19 pandemic. Eligible employers who retained their employees might be eligible for this tax credit in the 2021 filing season, but this federal offering is complex, leaving many small business owners asking their accountants: What is the employee retention credit? And does my small business qualify?
To better understand the ins and outs of the ERC, we spoke to an experienced CPA and small business tax specialist. Ernie Villany, CPA, is the founder and president of Boulder Valley CPA, a Colorado-based CPA/advisory firm representing clientele in 30 states.
Villany has over 20 years of experience in public accounting, helping small business owners around the world plan and manage their businesses’ financial growth while mitigating tax liabilities.
Here’s his expert breakdown of this new tax credit.
Determining Eligibility for the Employee Retention Credit
“Under the American Rescue Plan Act of 2021, the ERC allows employers to offset their payroll tax liabilities against 70% of qualified wages, up to a $10,000 limit per quarter,” says Villany.
Determining whether your business qualifies for this significant tax credit is the first step as eligibility hinges on information about your business’s size, revenue loss, and more. Businesses that fully or partially shut down due to COVID-19 and/or experienced a decline in gross receipts of 20% in any quarter of 2021 were specifically called out as eligible, Villany says.
The ERC has evolved quickly with changing regulations, eligibility criteria, and more. Consult an experienced accountant, CPA, or financial/tax adviser to make sure you’re assessing your eligibility for the credit based on the latest criteria.
Villany highlights two recent, subtle (but important) changes that some business owners might not be aware of:
- Business Size. If eligible, there are two ways this credit can be claimed: in advance, as a credit against your quarterly employment tax filing, or whenever your business files its annual taxes. “Businesses with fewer than 500 employees may claim the credit in advance,” notes Villany. He says this option used to be restricted to businesses with fewer than 100 employees, but that has been changed.
- Paycheck Protection Program (PPP)-Based Restrictions. Employers who received relief under PPP loans weren’t eligible for the ERC — but that’s not the case anymore. “With PPP loans limited to only 2.5 times an employer’s payroll, there could be substantially more uncovered wage expense than an employer originally estimated,” says Villany.
What to Consider Before Taking the Employee Retention Credit
While the ERC can be a valuable and welcome financial infusion, Villany cautions that taking the credit comes with important responsibilities that shouldn’t be overlooked. “Because it’s a refundable tax credit, the ERC demands additional bookkeeping responsibilities some business owners may not be prepared to implement or maintain,” he says.
“From the extensive effort all business owners must go through to determine their ERC eligibility before claiming the credits to the extra-close attention they must commit to payroll processing and payroll tax preparation, claiming the ERC is not to be entered into lightly,” advises Villany.
What’s at stake if you get it wrong?
Villany notes that making a miscalculation or getting the details wrong can come with expensive, time-consuming consequences for small business owners.
“It could be mild wear, tear, and cost of amending incorrect payroll tax returns. Or the potentially massive expense of an IRS audit over improperly claimed ERC credits,” he explains. “These are things that employers need to be mindful of — the range of possible pitfalls that the ERC inherently possesses.”
Qualified small business owners shouldn’t let the potential risks or downsides scare them away. However, it’s important to be fully confident that you’re eligible and that you have the support and resources for the areas that matter most. These may include:
- Verifying eligibility
- Calculating the credit
- Filing your tax forms
- Bookkeeping and compliance
Where to Get More Information
If you’re still wondering whether the employee retention credit is right for your business, you’re not alone. The IRS offers detailed guidance that can serve as a starting point for any owner as you prepare your financials and look ahead to tax season.
Also, consider consulting a tax adviser. They’ll be able to walk you through specific questions, such as:
- What is the employee retention credit?
- How do I calculate the employee retention credit?
- Is claiming this tax incentive appropriate for my business?
The complexity of this credit makes it essential that small business owners understand the potential benefits — and possible pitfalls — as thoroughly as possible to determine if it’s right for them.