Do you have employees in your business or organization? Are you looking for ways to save money on taxes and help keep your employees? The Employee Retention Credit is an important way to do both of these things, but unfortunately, there are many misunderstandings that can prevent businesses from taking full advantage of this credit. In this article, we'll look at 10 of the most common misunderstandings of the Employee Retention Credit, so you can make sure you're not inadvertently missing out on this valuable tax credit.

10 Misunderstandings of the Employee Retention Credit

Misunderstanding #1: It Can Only be used if your business is closed

This is a common misconception about the Employee Retention Credit (ERC). The ERC was created to help businesses keep employees on the payroll during the COVID-19 pandemic. It can be used when a business is forced to close due to government orders, or when the business is open but has seen a significant drop in revenue. In either case, businesses can qualify for the ERC.

In order to be eligible for the ERC, businesses must have a decrease in gross receipts of at least 50% compared to the same quarter in 2019. If the business is a new business, it must compare its gross receipts to the same quarter in 2020. It is important to note that businesses must also meet other criteria in order to be eligible for the ERC.

The ERC is a great way for businesses to keep their employees on the payroll, even if they are unable to open their doors due to the pandemic.

Not All Employees Qualify

The ERC is available only for employees who are not providing services to the business. This means that employees who are providing services are not eligible for the ERC. This includes employees who are working from home, as well as employees who are on furlough or have been laid off.

It is important to note that employees who are providing services can still be eligible for other forms of relief, such as the Paycheck Protection Program or other government-funded relief programs.

Misunderstanding #2: The ERC is only available to businesses that have seen a decrease in gross receipts

The ERC is available to businesses that have seen a decrease in gross receipts of at least 50% compared to the same quarter in 2019. However, it is important to note that businesses must also meet other criteria in order to be eligible for the ERC. For example, businesses must have fewer than 500 full-time employees, and they must be able to demonstrate that they have experienced a decrease in gross receipts.

It is also important to note that businesses must be able to demonstrate that they have experienced a decrease in gross receipts due to the pandemic in order to be eligible for the ERC. This means that businesses that had a decrease in gross receipts prior to the pandemic are not eligible for the ERC.

The ERC is a great way for businesses to keep their employees on the payroll, even if they are unable to open their doors due to the pandemic.

Not All Businesses Qualify

The ERC is only available to businesses that have seen a decrease in gross receipts of at least 50% compared to the same quarter in 2019. In addition, businesses must have fewer than 500 full-time employees in order to be eligible for the ERC.

It is important to note that the ERC is not available to certain businesses, such as businesses that are excluded from the definition of “employer” in the Internal Revenue Code, or businesses that are not subject to federal employment taxes.

Misunderstanding #3: It Only Applies to Wages Paid in 2020

The ERC can be used to offset wages paid in 2020 and 2021. This means that businesses can use the ERC to offset wages paid in 2020, as well as wages paid in 2021. It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

The ERC is a great way for businesses to keep their employees on the payroll, even if they are unable to open their doors due to the pandemic.

It Can Be Used for Certain Other Costs

The ERC can also be used to offset certain other costs, such as health plan expenses and paid sick leave. This means that businesses can use the ERC to offset the cost of providing health insurance for their employees, as well as the cost of providing paid sick leave.

It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

Misunderstanding #4: It Can Only Be Used Once

The ERC can be used multiple times. This means that businesses can use the ERC multiple times in order to offset wages paid in 2020 and 2021. It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

The ERC is a great way for businesses to keep their employees on the payroll, even if they are unable to open their doors due to the pandemic.

It Can Offset Both Wages and Certain Other Costs

The ERC can be used to offset both wages and certain other costs, such as health plan expenses and paid sick leave. This means that businesses can use the ERC to offset the cost of providing health insurance for their employees, as well as the cost of providing paid sick leave.

It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

Misunderstanding #5: It Can Be Used to Offset Only Certain Types of Wages

The ERC can be used to offset wages paid to employees for any reason, including wages paid for vacation, sick leave, and other forms of paid leave. This means that businesses can use the ERC to offset the cost of providing paid leave for their employees.

It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

It Can Be Used to Offset Certain Other Costs

The ERC can also be used to offset certain other costs, such as health plan expenses and paid sick leave. This means that businesses can use the ERC to offset the cost of providing health insurance for their employees, as well as the cost of providing paid sick leave.

It is important to note that businesses must still meet the other criteria in order to be eligible for the ERC.

Related FAQ

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a refundable tax credit available to employers who are experiencing economic hardship due to the COVID-19 pandemic. The ERC is designed to encourage businesses to keep their employees on their payroll by providing a refundable tax credit for up to 50% of qualified wages paid to employees up to $10,000 per employee. Eligibility for the credit includes employers whose operations were fully or partially suspended due to a governmental order related to the COVID-19 pandemic, or employers whose gross receipts declined by more than 50% compared to the same quarter in the prior year.

What are the requirements for the ERC?

To be eligible for the ERC, employers must meet the following criteria: (1) suspend operations due to a governmental order related to the COVID-19 pandemic or (2) experience a significant decline in gross receipts compared to the same quarter in the prior year. Additionally, employers must have paid qualified wages to employees between March 13, 2020 and December 31, 2020. Qualified wages are wages paid to an employee for which the employer is allowed a deduction for federal income tax purposes.

How much is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit of up to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee. The credit is available to employers whose operations were fully or partially suspended due to a governmental order related to the COVID-19 pandemic, or employers whose gross receipts declined by more than 50% compared to the same quarter in the prior year.

Can I claim the Employee Retention Credit and the Paycheck Protection Program (PPP) loan at the same time?

Yes, employers may be eligible to claim both the Employee Retention Credit and the Paycheck Protection Program (PPP) loan. However, employers must make adjustments to the PPP loan amount if the ERC is claimed for the same wages. Any wages that are used to calculate the ERC must be excluded from the PPP loan forgiveness calculation.

When does the Employee Retention Credit expire?

The Employee Retention Credit is available for wages paid between March 13, 2020 and December 31, 2020. However, the credit is scheduled to be extended through June 30, 2021. The extension is subject to Congressional approval.

What are the reporting requirements for the ERC?

Employers claiming the Employee Retention Credit are required to report the credit on Form 941, Employer’s Quarterly Federal Tax Return, or Form 944, Employer’s Annual Federal Tax Return. Additionally, employers claiming the credit must maintain adequate records to support the calculation of the credit. These records must be kept for at least three years after the due date of the return on which the credit was taken.

Top 10 ERC Misconceptions | Employee Retention Credit

The Employee Retention Credit is an important tool for businesses to use, but it is important for business owners to understand the eligibility requirements and the details of the credit in order to maximize their savings. While there are many misunderstandings of the Employee Retention Credit, with a better understanding of the credit, businesses can take advantage of this valuable tax incentive and help their bottom line.