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February 6, 2023 Expert’s Corner

Claiming the Employee Retention Credit: How to qualify and avoid scams

Brenden Healy
By Brenden Healy

Businesses can still claim the Employee Retention Credit (ERC) if they had to temporarily or permanently close operations due to COVID-19.

The ERC program generally allows for a three-year window for businesses to claim the credit. Therefore, businesses can claim the 2020 credit until April 15, 2024, and 2021 expenses by April 15, 2025.

ERC basics

To encourage companies and organizations to keep their employees on payroll, the ERC was enacted by the Coronavirus Aid, Relief and Economic Security (CARES) Act and signed into law in March 2020.

In 2021, the Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act (ARPA) amended and extended the credit.

The ARPA amendment allows small employers that received a Paycheck Protection Program (PPP) loan to also claim the ERC.

For 2021, an employer can receive a 70% credit for the first $10,000 of qualified wages paid (i.e. $7,000) per employee in each qualifying quarter of 2021. This could be a 2021 maximum of $21,000 per employee.

This is an increase from 50% (or $5,000) per employee for all 2020. The credit generally applies to wages paid or incurred from March 13, 2020, through September 30, 2021.

Additionally, the cost of employer-paid health benefits can be included as part of employees’ qualified wages.

How to qualify

In order to be eligible for the ERC, employers must have:

  • Experienced a full or partial cessation of operations as a result of government-mandated restrictions on commerce, travel or group gatherings during 2020, or the first three quarters of 2021, due to COVID-19; or
  • Experienced a considerable drop in gross receipts in 2020, or the first three quarters of 2021; or
  • Been considered a recovery start-up business during the third or fourth quarter of 2021.

Avoiding ERC scams

The IRS is cautioning employers to be vigilant of third parties that may be encouraging them to claim the ERC when they are not eligible.

Some third-party providers, often referred to as “ERC mills,” are guaranteeing businesses a refund without fully understanding the employer’s circumstances.

These providers may use various means of communication, such as emails, letters, voicemails and even television advertising, to reach out to businesses. When businesses respond, these “ERC mills” may make false claims for write-offs related to the credit, which does not align with the taxpayer’s eligibility and calculation of the credit.

These third parties may also neglect to inform businesses that wage deductions reported on the companies’ federal income tax returns must be adjusted to account for the credit amount.

Thus, the ERC is taxable to the business, unlike PPP loan forgiveness.

Businesses should cautiously approach advertised schemes or direct solicitations that promise excessive tax savings. Incorrectly claiming the ERC may result in the credit being repaid along with penalties and interest charges.

Brenden Healy is a tax partner in the Hartford office of accounting and consulting firm Whittlesey.

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