The Advertised Employee Retention Credit Firms are both correct (mostly) and a SCAM (mostly).
By Tom Carson Jones, CPA, CGMA
Steele Martin Jones
Certified Public Accountants and Business Advisors
Annual Payroll Newsletter
The Advertised Employee Retention Credit Firms
are both correct (mostly) and a SCAM (mostly)
Our government has been making its best effort to throw money at people and businesses since Covid hit. Everyone got three sets of stimulus checks, nearly all small/medium businesses got PPP money, and some businesses received second round of PPP and/or EIDL loans. It’s arguable whether all this extra money in the system has led to the current inflation problems and lack of workers.
But wait … there’s more! Actually, the Employee Retention Credit (ERC) was announced and available during the height of Covid. It would appear that there are many businesses out there that could/should get the ERC that haven’t. One source reports that the IRS expected 60% of businesses to apply for ERC; as we’ve looked at our clients, somewhere near 30% are qualifying (maybe less for us since TN wasn’t closed down nearly as much). Through summer 2022 only 7% of businesses nationwide had filed for ERC.
First, a reminder of Eligible Businesses for ERC – any one of these:
- Reduced Gross Receipts Test: For 2020, a significant decline in gross receipts is down 50% or more for a calendar quarter vs. the same quarter of 2019. For 2021, the test is down 20% from the same quarter of 2019 (not 2020). In 2021, as an alternative, you can also use the prior quarter vs. the same prior quarter of 2019 for the test.
- Government Order Test: “The trade or business is fully or partially suspended due to an order from an appropriate governmental authority …” In our part of Tennessee, that’s generally late March 2020 through late April or early May … longer in the metro areas. If you were able to fully operate and work remotely (most offices), you weren’t affected.
- Supply Chain Test: In limited cases, if your business operations were significantly impacted by supply chain issues due to Covid, wages could be eligible for ERC. Lack of your employees is not a supply chain issue.
- This is newer: “Recovery Startup Businesses” are businesses that began after 2/15/20 and aren’t affiliated with any other business. Maximum benefit is $50,000/quarter, only in Q3 and Q4 of 2021.
Amount of Credit for ERC:
Rules differ for companies with over 100 full-time employees. We focus on under 100 here …
- For 2020, it was 50% of eligible wages, up to $5,000 credit per year per employee
- For 2021, it is 70% of eligible wages, up to $7,000 credit per QUARTER per employee
- ERC can’t be paid on family members (broadly defined) of the majority owner
For the above, you can’t claim the ERC on the same wages you used for PPP forgiveness. Some might qualify for the ERC beginning date of 3/12/20 through the date of your PPP loan (April in many cases). This cuts out most of the Q2 2020, but would still be available for late 2020 and most of 2021. As the ERC was first presented, you couldn’t claim ERC at all if you had PPP. Now both are available – just not for the same payroll dollars.
Congress and the IRS haven’t helped this situation any. Rules for ERC changed several of times, and official guidance (especially on supply chain issues) is sparce.
So, in come the folks advertising that they can get you an ERC. Many of you have been getting phone calls and/or advertising from firms offering to help you with the ERC filing, usually in exchange for a percentage of the take. And you don’t have to pay until you get the money! We’re seeing that the percentage fee is from 10% to 30%. Our fees are at our standard billing rates and have usually been under $1,000, even for refund requests that we’ve prepared in the mid-six figures.
Because this is so lucrative for the other preparers, many (maybe most??) are much more aggressive in thinking you qualify than we would ever be. Remember that YOU sign the refund request and are responsible under penalty of perjury that the info contained is correct. In some cases, an incorrect refund request could be criminal tax fraud, and you may be left holding the bag.
Signs to look for with a paid ERC preparer.
- They will tell you that they back their work, but how long have they been in business? They definitely will be around to collect their %, but will they be there when you get audited?
- Can they explain to you fully in layman’s terms, preferably in writing, why you qualify for the refund?
- A paid preparer is supposed to sign the refund request (and any tax return prepared). We’ve seen many where it was not signed and left for you (only) to sign.
- Although they have “tax attorneys on staff”, those attorneys represent their interests, which may or may not match your interests.
IF I WERE ONE OF THE NEW 87,000 IRS EMPLOYEES, I’D BE AUDITING THIS.
Quite frankly, I’d bet an entry-level IRS auditor could fully audit one of these refund applications in a day. Compare that to a full-blown audit which would take weeks. Where is the best return for the IRS on their time invested? If you really do qualify, please don’t be scared of a potential audit. If it’s a grey area, think about it.
- Along with the ERC, a small business could take a tax credit if it paid the employee sick pay because the employee or a member of his/her household had Covid, through 9/30/21. If you missed that credit, we can still amend the payroll tax returns to catch this. A comparable credit was also available for an owner’s 1040.
- An employer sponsored daycare reimbursement can be better for some employees. Not only is it excluded from taxable income, but it also is excluded from payroll taxes. This generally works better for higher-income employees.
- Through 2025, employers can offer up to $5,250 in student loan repayment benefits – fully deductible to the employer and non-taxable to the employee. The “catch” is that it must be offered to all and can’t reduce their pay.
- The government recognized that there has been substantial fraud in the PPP and EIDL programs. The Statute of Limitations has been raised to ten years for those (vs. normal 3 years). There is five-year statute of limitations on ERC from the time of the refund request.
SMJC PAYROLL HOURS: Our payrolls generally come in midday Monday to Thursday afternoon. As such, the payroll staff works extra hours mid-week, and they are gone by noon Friday. Please remember to check your payrolls before noon, as we won’t have staff available to help.
Disclaimer: We produce this newsletter for our clients and others who are concerned about planning and managing their tax affairs. Each business or individual’s tax situation is unique, and the material in this newsletter is not intended to constitute specific accounting, tax, investment, or legal advice. This newsletter is a general overview of each topic and is not intended to be a substitute for specific advice, as the impact of items mentioned will not be the same for every taxpayer. Accordingly, where specific advice is necessary or appropriate, consultation with a competent professional advisor is highly recommended.