Should You Apply for Employee Retention Credits for Your Business?

Small businesses were hit significantly hard during COVID-19. State governments required non-essential businesses to shut down depending on the services or products offered. Essential businesses included those providing communication services and other necessities or tackling health-related issues affected by COVID-19. Other businesses were forced to shut down for an extensive period and lost consistent revenue. 

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), trade or businesses negatively impacted by the pandemic could receive Employee Retention Credits (ERC), which encouraged employers to keep their employees on payroll. Though this program officially ended last year, the tax credits can still be retroactively applied under certain conditions. Eligible businesses that COVID-19 financially impacted can receive a refundable tax credit equal to at least 50% of qualified wages paid to employees between March 12, 2020, and October 1, 2021, for most businesses and up to January 1, 2022, for designated Recovery Startup Businesses. This includes tax-exempt organizations classified under a 501(c) status. However, if you are self-employed, you are not eligible to claim a credit with respect to your own earnings. Below are some important and helpful tips if you are an employer considering retroactively applying for these credits.

Helpful Tips

Which businesses can claim ERC?

Eligibility for retroactive ERC is very attenuated but generally requires a business to have experienced periods when operations were suspended by the government due to COVID-19, or show a significant decline in gross receipts compared to 2019, regardless of whether employees were providing services during the period of substantial decline. The credits apply to proven time periods of a significant decline in gross receipts or any quarter in which a business was suspended by the government. 

Keeping up with records

The IRS recommends keeping all employment tax records for at least 4 years. But as it pertains to health insurance costs, sick/family leave records, and employee retention credit records, the IRS recommends keeping these documents for at least 6 years. Copies must always be submitted to the IRS if requested.

Example of a small business suspended by the government

Employer D operates a physical therapy facility in a city where the mayor has ordered that only essential businesses may operate. Employer D's business is not considered essential under the mayor's order, which requires Employer D to close its workplace. Prior to the governmental order, none of Employer D's employees provided services through telework, and all appointments, administration, and other duties were carried out at Employer D's workplace. Following the governmental order, Employer D moves to an online format and can serve some clients remotely, but employees cannot access specific equipment or tools that they typically use in therapy, and not all clients can be served remotely. Employer D's business operations are partially suspended by the governmental order because Employer D's workplace, including access to physical therapy equipment, is central to its operations, and the business operations cannot continue in a comparable manner.

How can you file?

Generally, over and underreported taxes on a previously filed Form 941 can be corrected if you as an employer file Form 941-X, the Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund form within 3 years of the date the Form 941 was filed. The IRS calls these time frames a “period of limitations.” 

For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year even if filed before that date. Example. You filed your 2019 fourth quarter Form 941 on January 28, 2020, and payments were timely made. The IRS treats the return as if it were filed on April 15, 2020. On January 18, 2023, you discover that you overreported social security and Medicare wages on that form by $350. To correct the error, you must file Form 941-X by April 18, 2023, which is the end of the period of limitations for Form 941, and use the claim process.

**The assessment of eligibility for the ERC tax credit is a case by case determination. Always consult either a certified accountant, financial advisor, or lawyer for your business tax needs** 

Sources:

Visit irs.gov for more information on the Employee Retention Credit and how to apply.

• https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs
• https://www.irs.gov/coronavirus/employee-retention-credit
• https://www.irs.gov/pub/irs-pdf/i941x.pdf
• https://www.cisa.gov/identifying-critical-infrastructure-during-covid-19