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Small Businesses Urged to Have a Qualified Tax Professional Review Eligibility for Employee Retention Credit
The Employee Retention Credit
Small businesses are being bombarded with ads, emails, and phone calls from companies promising to help them claim pandemic-era tax credits. The problem is that businesses are being charged up to 30% of the credit received by unscrupulous schemes and "ERC mills." Business owners must have a qualified tax professional review eligibility for the employee retention credit (ERC) to avoid any such fraud.
Complexity of Claiming the Employee Retention Credit
One of the challenges of claiming the employee retention credit is complexity, with rules having changed between 2020 and 2021. While eligibility was initially from March 13 through December 31, 2020, the timeline was extended through the third quarter of 2021 for most businesses. To qualify in 2020, businesses needed a government-mandated full or partial shutdown, or a "significant decline" in revenue, and a reduction of "less than 50% of gross receipts," compared with the same calendar quarter in 2019.
Expanding the Employee Retention Credit from 2020 to 2021
The credit was expanded from 2020 to 2021, originally covering 50% of qualified wages, limited to $10,000 annually per employee, for a maximum credit of $5,000 per employee in 2020. For 2021, the credit jumped to 70% of wages, $10,000 quarterly per employee, worth up to $7,000 per quarter or $28,000 per year. Further, the credit applies to tax year 2020 or 2021, but business owners must still amend their returns and claim the credit.
Difficulty in Retroactively Claiming the Employee Retention Credit
One of the difficulties of retroactively claiming the employee retention credit is that business owners must amend other returns as well. The process begins with Form 941-X -- the adjusted payroll tax return -- and the changes flow down to business and personal income tax returns, leading to a "cascade effect," according to industry experts.
Warning about Third Parties Promoting Employee Retention Credit
The IRS warns taxpayers to avoid promoters who mislead people into thinking they can claim these credits. After warning business owners about third parties promoting the employee retention credit in October 2023, the IRS added the issue to its annual list of "Dirty Dozen" tax scams. Moreover, taxpayers are "ultimately responsible for the accuracy of the information on their tax return," and the agency is stepping up enforcement for these claims.
Seek Professional Help to Claim Employee Retention Credits
It's important to go talk to a qualified professional, such as a CPA, enrolled agent, tax attorney, or financial advisor. Taxpayers must ensure that the people helping them with their tax returns are willing to put their name on the filing as the paid preparer. There are hundreds of firms that will help businesses claim the credit and sign their name on it.
small businesses should be cautious about seeking assistance from third-party promoters when it comes to claiming employee retention credits. Rather than paying exorbitant fees, business owners should consider seeking help from qualified tax professionals to review their eligibility for the credit. This is especially important given the complexity of the rules around claiming the credit, which were changed between 2020 and 2021 and require businesses to navigate retroactive claim procedures. While amending tax returns can be a challenge, it is important that business owners take the necessary steps to ensure the accuracy of their returns and avoid falling victim to tax scams. Overall, seeking professional help to claim employee retention credits is a worthwhile investment in the long-term financial health of any small business. By working with a qualified tax professional, businesses can avoid costly mistakes and ensure that they are taking full advantage of the benefits available through the ERC program.
