Are you a small business owner looking to claim the Employee Retention Credit (ERC) tax refund? It’s an excellent opportunity to keep your employees on payroll during the pandemic, but there are some common mistakes you need to avoid to ensure a successful application process.
In this article, we’ll walk you through the top five mistakes business owners make when applying for the ERC. From eligibility criteria misunderstandings to miscalculating credit amounts, we’ll cover everything you need to know to avoid these pitfalls.
Don’t miss out on this valuable opportunity by making these mistakes. Instead, keep reading to learn how to navigate the ERC Tax Refund application process like a pro!
Mistake 1: Misunderstanding Eligibility Criteria
Small business owners must meet specific eligibility criteria to qualify when applying for the Employee Retention Credit (ERC) Tax Refund. Unfortunately, one of the most common mistakes business owners make is misunderstanding the eligibility requirements, which can result in missed opportunities to claim the tax credit.
To qualify for the ERC, businesses must have experienced a significant decline in gross receipts or been subject to a full or partial suspension due to government orders related to COVID-19.
However, some business owners mistakenly assume that they are not eligible because they did not shut down entirely, or they believe that the credit is only available to businesses that have experienced a decline in revenue. These misconceptions can result in businesses missing the opportunity to claim the ERC credit.
It’s important to note that the qualifications for the ERC have changed due to the Consolidated Appropriations Act (CAA) of 2021. For example, a reduction in gross receipts of 20 percent now qualifies for the credit instead of the previous requirement of 50 percent. Additionally, even partial suspension orders from the government could qualify businesses for the ERC.
Scenarios that may qualify for the ERC credit include:
- Partial shutdowns
- Supply chain and vendor shutdowns
- Reduction of hours to accommodate sanitation
- Shutdowns of some locations and not others
In every case, the critical factor is whether or not a government-ordered suspension interrupted business operations.
Another common misconception is that businesses cannot claim the ERC if they have already claimed the Paycheck Protection Program (PPP) or had their PPP loans forgiven. However, the CAA of 2021 has removed the limitation on only claiming one or the other. In addition, PPP will only account for 2.5 times the monthly payroll expenses and is meant to be spread out over six months, leaving plenty of uncovered wage expenses for claiming the ERC.
To avoid misunderstanding the ERC eligibility criteria, reviewing them thoroughly and seeking guidance from ERC tax experts is crucial. Working with an expert can help businesses identify if they meet the requirements for the ERC tax refund and ensure that they claim the credit accurately. By avoiding this mistake, business owners can increase their chances of a successful application process and secure the ERC Tax Refund that they’re entitled to.
Mistake 2: Miscalculating the Credit Amount
Calculating the ERC amount can be a complex process that requires careful attention to detail. This section will discuss how the credit amount is calculated, common mistakes employers make when calculating the credit, and tips for accurate calculation.
Some of the mistakes employers make include miscalculating qualified wages, not properly accounting for health plan expenses, and failing to consider changes in the credit amount for 2021. By understanding the eligibility criteria and seeking guidance from ERC tax experts, employers can avoid these mistakes and successfully apply for an ERC tax refund.
How is the ERC Calculated?
The ERC credit is calculated based on employees’ qualified wages and health plan expenses. The maximum credit amount per employee is $5,000 for the year 2020 and $7,000 for each quarter of 2021. To calculate the credit, eligible employers must determine their qualified wages, which include wages paid to employees during the eligible period.
Consider the number of employees on the payroll for a given quarter. For businesses with over 100 employees, qualified wages are paid to employees not providing services due to a full or partial suspension of operations or a significant decline in gross receipts. For businesses with 100 or fewer employees, all wages paid during the eligible period qualify for the credit, regardless of whether the employees provide services.
The credit amount is then calculated as 50 percent of qualified wages up to the maximum credit amount per employee. Finally, the credit can be applied against the employer’s share of Social Security taxes or refunded if the credit exceeds the employer’s payroll tax liability.
Calculating Qualified Wages
There are several common errors employers encounter when calculating qualified wages for the ERC refund. One error often made is miscalculating the qualified wages. Some employers mistakenly include ineligible wages or exclude qualified wages, leading to an incorrect credit amount.
Another common ERC filing mistake is failing to properly account for health plan expenses. Eligible health plan expenses, such as premiums paid by the employer, can be included in calculating the qualified wage, but employers may overlook this when calculating the credit.
Additionally, some employers may not be aware of the difference in calculating the credit for 2020 and 2021. The maximum credit amount per employee increased from $5,000 in 2020 to $7,000 per quarter in 2021. Failure to consider this can result in an inaccurate ERC tax credit calculation.
Tips for Accurate ERC Credit Amount Calculation
To avoid miscalculating the ERC tax credit amount, employers should ensure they have a clear understanding of the eligible wages and expenses. Employers should also keep accurate records of wages paid and health plan expenses incurred during the eligible period.
Working with a qualified ERC tax expert can help ensure accurate credit calculation. In addition, these experts can guide the eligibility criteria and help employers determine the qualified wages and expenses.
Finally, reviewing the IRS guidance on calculating the ERC tax credit and staying current on any program changes or updates is essential. By taking these steps, employers can avoid mistakes and ensure a successful ERC tax refund application.
Mistake 3: Missing the ERC Refund Timeline
Small business owners often miss the opportunity to receive the ERC tax refund by overlooking the refund timeline. This timeline refers to the deadline for submitting the ERC refund claim to the IRS.
To avoid this common mistake, small business owners should be aware of the specific deadline for their situation and plan accordingly. While the refund timeline varies depending on whether the business has filed its tax return, small business owners should ensure they have all the necessary documentation and information before submitting the claim.
Mistake 4: Not Keeping Proper Documentation
Another mistake that small business owners make when applying for the ERC is not keeping proper documentation. Documentation is essential to prove eligibility and accurately calculate the ERC tax credit amount. Without adequate documentation, small business owners may not be able to claim the full credit amount they are entitled to or may face penalties if audited by the IRS.
Small business owners may overlook the importance of documentation or not keep proper records of wages and health plan expenses. They may also fail to document their eligibility or incorrectly document their eligibility, leading to a denied ERC refund claim.
To avoid mistakes related to documentation, small business owners should keep accurate and detailed records of all wages and health plan expenses paid during the eligible period. They should also document their eligibility criteria, such as the number of employees and the impact of COVID-19 on their business operations. Employers can consult an ERC tax expert to ensure they have the proper documentation and meet all IRS requirements.
Mistake 5: Not Working with ERC Tax Experts
Here’s the last and most critical mistake:
Small business owners often avoid seeking expert guidance when applying for the ERC. That becomes costly when there’s confusion on eligibility or essential tax documents are filed incorrectly.
Small business owners may underestimate the complexity of the ERC process. As a result, they may also hesitate to spend money on expert guidance or believe they can handle the process independently.
Our professional team of Certified Public Accountants (CPAs), lawyers, data analysts, and payroll specialists at ERC Tax Experts have over fifty years of combined experience. We’ve developed a proprietary process to maximize your ERC, helping over 160 clients claim $37 million in ERC tax credits. But, we go beyond just crunching numbers. We are with you every step of the way and provide you with a certified, audit-ready report to ensure peace of mind many years after receiving your Employee Retention Credit.
We make it simple to claim your ERC tax credit. So get started with our simple 10-question survey today.