The Internal Revenue Service (IRS) recently issued a warning regarding the Employee Retention Credit (ERC). The ERC is a complex tax credit available to certain businesses and tax-exempt entities affected by the pandemic. The IRS advises that applying for the credit requires careful review before filing. Further, they warn that there are numerous scams involving the ERC and businesses and tax-exempt organizations should be cautious of aggressive ERC marketing.
The ERC was enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in order to encourage employers to keep employees on payroll by providing employers with a tax credit refund on certain employment taxes paid by the employer, up to a certain amount, on qualified wages. The ERC applies to qualified wages paid between March 13, 2020 and December 31, 2021. Eligible employers may claim a credit of up to $5,000 for 2020 and $28,000 for 2021, for each employee. Employers are eligible if they carried on a business or trade during 2020 or 2021 that was either (1) fully or partially suspended during 2020 or the first three quarters of 2021; (2) experienced a significant decline in gross receipts in 2020 or during the first three quarters of 2021; (3) or qualified as a recovery startup business. The deadlines for filing for the ERC are April 15, 2024, for 2020 tax periods and April 15, 2025, for 2021 tax periods.
Determining eligibility for the ERC requires a careful analysis of the employer’s tax records and the specific circumstances surrounding the employer during the pandemic (e.g. the specific dates of mandated closure). Incorrectly filing for the ERC may result in an employer being required to repay the credit and the assessment of interest and penalties.
Nonprofit organizations should heed the warnings of the IRS and be wary of companies that advertise assistance in the ERC filing process. Organizations should do their due diligence investigating these companies and should not provide confidential employee records or business information to these companies. LCW attorneys can assist in determining whether an organization qualifies for the ERC.