To help small businesses keep employees on their payroll during the pandemic, Congress introduced the Employee Retention Credit (ERC) in 2020, which is a tax credit that can be claimed on the quarterly payroll tax reports. Since its inception, additional laws have modified the qualifications, and it is now quite a complex area.
Because it can be a windfall for some companies, ERC “mills” have sprung up, aggressively marketing to businesses like yours and offering to calculate the ERC for a large percentage commission. The bad news is that some of these mills are misinterpreting the law, and some are outright frauds. We want you to understand the risk you may be taking if you decide to engage with these mills.
While we want you to claim any ERC you fully deserve, we don’t want you to get audited in five years by the IRS and have to pay the ERC back because it was disallowed. Not to mention, you will still be out the large commission you paid to the mill, which is likely long out of business.
Qualification rules vary, almost quarter by quarter. In essence, your business can qualify in three ways:
- Drop in gross receipts, as specifically outlined by the law and IRS guidance.
- Government shutdown, again specifically defined in the law.
- Recovery startup business, which is a special term for new businesses.
It’s beyond the scope of this article to provide exact rules for who qualifies for ERC, and there are many gray areas as well. As with all complex tax issues, we are here to help you determine eligibility, discuss the gray areas with you, and help you evaluate the amount of risk you wish to pursue.
The IRS has already closed a few of these ERC mills, but they are prolific. You’ve likely received some automated phone messages and other marketing communications. Please take care if you decide to contact these mills, and know that we are here to help you sift through the legalities of your tax issues.
Due to the rampant fraud in ERC claims and the large numbers, the IRS is expected to begin auditing these claims. You will want to keep proof of your claims for five years after the payroll tax forms have been filed.
We believe the ERC to be a great program for small business. Please exercise caution when having dealings in this area and make sure you are working with someone who has full knowledge of the laws and your risk tolerance. And, of course, reach out any time.