You’ve probably heard that taxes are one of only two inevitabilities we can count on in this world. However, “inevitable” does not necessarily mean “enjoyable.” If you’re not an accountant or other tax professional, you probably find filling out the required paperwork tedious at best. It may also feel unfair that you work hard to make money and then have to send a portion of it to the government. Tax credits, like the ERC, can help maximize the money you get to keep.
The Employee Retention Credit (ERC) was introduced as part of the CARES Act to help alleviate some of the economic and financial pressure caused by COVID lockdowns. It rewards businesses for keeping employees on their payroll for Q2 of 2020 through Q3 of 2021. With the ERC tax credit, businesses can get back up to $26,000 per employee. This sounds like a great deal–so why have so many businesses failed to take advantage of it?
One of the many reasons businesses are not claiming their ERC tax credits is that they don’t know they qualify. Unfortunately, there has been a lot of misinformation about the program and who qualifies, preventing small businesses from claiming the money they are owed. We’re here to debunk the 6 biggest myths about who can qualify for the ERC tax credit.
What’s the difference between a tax credit and a tax deduction?
It’s no secret that most people and entities do their best to pay as little in taxes as they legally can. There are two ways to minimize your tax bill: tax deductions and tax credits. Tax reductions, which are more common, work by reducing the amount of your income that could be taxed. How much this reduces your tax bill in dollars depends on your tax rate. Tax credits reward businesses for taking actions the government deems beneficial by reducing the amount of taxes they owe. They are much harder to qualify for because they reduce your tax bill by a total dollar amount.
Let’s say that someone makes $100,000 in a year and has a tax rate of 15%. With no deductions or credits, their tax bill would be $15,000.
Now, let’s say they claim a $10,000 deduction. Their taxable income is now $90,000. Taxed at 15%, their tax bill is now $13,500. This is only $1,500 lower than their original bill.
However, if they were to claim a $10,000 tax credit, they no longer have to pay $10,000 worth of taxes, and their bill would decrease to $5,000.
As you can see, a tax credit can massively decrease how much you pay in taxes. This is why the government has relatively high eligibility requirements for most tax credits.
Top ERC Myths Debunked
The entire economy suffered due to COVID, but not all businesses were impacted equally. For example, large national and multinational corporations were less likely to see a significant impact. They generally have more savings to fall back on than small businesses, and many could turn to online orders to keep cash flowing in. ERC was specifically introduced to help small businesses with less than 100 FTE (full-time equivalent) employees whose receipts decreased by 50% or more during any quarter of 2020. However, as the COVID pandemic dragged on longer than anticipated, the government expanded eligibility to mitigate the effects of ongoing economic upheaval. This means many people who were not eligible when the ERC was first introduced have become eligible in the intervening period.
Myth #1: It’s too late for my business to claim tax credits from 2020 and 2021
By this point, you should have already filed your taxes for 2020 and 2021. If you didn’t claim the credits, you might assume you missed your chance. However, you can retroactively file for the return up to 3 years after your original filing deadline. This means businesses can retroactively file for the ERC or 2020 until April 15, 2024, and for 2021 until April 15, 2025. To claim your retroactive credit, you must file an amended return using Form 941-X.
Most businesses can claim the credit for wages paid from March 13, 2020, through September 30, 2021. However, recovery startups with gross receipts of no more than $1 million can claim the credit for wages paid up until December 31, 2021.
Myth #2: I already received a PPP loan or had my PPP loan forgiven
The Paycheck Protection Program (PPP) was also introduced as part of the CARES Act to encourage employers to keep staff on their payroll despite closures and other business disruptions. Aid was administered through low-interest, forgivable loans that businesses could use to cover up to 8 weeks of payroll and other expenses. Originally, you could not take out a PPP loan and claim the ERC, but Congress later amended the Act to allow businesses to take advantage of both with a caveat. Businesses cannot claim the ERC for wages treated as payroll costs to obtain PPP loan forgiveness.
Myth #3: I started my business in 2019
To be eligible for the ERC tax credit, businesses had to demonstrate that their receipts for a given quarter of 2020 had decreased more than 50% compared to the same quarter of 2019. Therefore, in theory, a business that opened in Q3 or Q4 of 2019 would not be eligible to claim the ERC tax credit for Q1 through Q3 of 2020, as they would have no receipts from that quarter of the previous year. If this were true, it would be very unfortunate because businesses that had been open for less than a year before the pandemic closures would have fewer savings to fall back on during closures. Fortunately, the CARES Act took this into account. Therefore, businesses that opened in 2019 can use their first quarter of operations as a basis for comparison until they reach one year in business.
Myth #4: My business is a nonprofit
The ERC was promoted as a lifeline for small businesses, so many churches, nonprofits, and museums may not realize they also qualify. However, if your organization pays the IRS payroll taxes, you can also claim credits. The eligibility rules for nonprofits are the same as those for for-profit businesses: you must have less than 100 employees and have seen a 50% reduction in gross receipts from the same quarter of 2019 to claim the credit for any quarter of 2020. Claiming credits for 2021 has less stringent requirements and opens the program up to companies with less than 500 employees, who saw a 20% decline in gross receipts from the same quarter of 2021.
Myth #5: My receipts did not decrease by 50% or more
As we mentioned earlier, Congress made the eligibility requirements to claim the ERC tax credit for the first 3 quarters of 2021 more accessible than the eligibility requirements to qualify for 2020. By January 2021, the most stringent restrictions had been lifted, and the first vaccines had hit the market, allowing Americans to return to more normal economic activities. However, some businesses–especially small and medium-sized businesses–were slower to recover than others. Therefore, even if your receipts never decreased by more than 50% from the same quarter of 2019, if your revenue did not recover to 80% or more of what it had been in the same quarter of 2019 by 2021, you are eligible to claim your credit.
Myth #6: My business had more than 100 employees
Just like Congress expanded eligibility based on revenue decline for 2021, they also allowed businesses with more employees to claim the ERC tax credit. To claim the credit for 2020, a business needed to have 100 or fewer full-time employees during the 2019 calendar year. However, to claim the credit for 2021, businesses could have as many as 500 employees during the 2020 calendar year. Again, this was to support businesses that were slow to recover even as the country opened back up.
Think you might qualify for unclaimed ERC tax credits? Our team at ERC Tax Experts can help you determine your eligibility and get your payout sooner. Fill out our quick and easy questionnaire to get started.