The IRS has issued a warning to employers about the potential for third-party companies exploiting the Employee Retention Credit, urging them to be cautious when engaging in such activities when they may not qualify. Unfortunately, there are a few unscrupulous third parties that are making incorrect claims regarding taxpayers' eligibility and the calculation of the credit.

What is the ERC?

The Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes for an eligible employer whose business has been financially impacted by coronavirus. This credit was created as part of the CARES Act and then amended in The Consolidated Appropriations Act of 2021 (the “Act”) and the American Rescue Plan to help employers retain employees and cover payroll expenses. 

Who is eligible? 

All private sector employers, regardless of size, that carry on a trade or business during the calendar year 2020, including tax-exempt organizations may be eligible employers for purposes of claiming the ERC. The IRS has clarified that self-employed individuals are not eligible to claim the ERC against their own self-employment taxes, nor are household employers able to claim the credit with respect to their household employees.

To be eligible for the ERC, employers must have:

• Experienced a complete or partial closure of operations as a result of orders from an official governmental entity prohibiting business, travel, or group gatherings in response to the COVID-19 pandemic during 2020 and/or the initial three quarters of 2021.
• Experienced a major decrease in gross receipts during 2020 and the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.
• Experienced a notable disruption to their business operations as a result of COVID-19

What should employers be aware of? 

The IRS warns employers that making false claims for the Employee Retention Credit (ERC) can result in significant penalties.

Employers should beware of third parties promoting improper ERC claims. If a third party is offering a credit that seems too good to be true, or encourages an employer to make false claims for the credit, it might result in taxpayers being required to repay the credit along with penalties and interest. Employers should also be aware that they may not claim both the ERC and credits provided under other sections of the CARES Act, such as those provided for Paid Sick or Family Leave on the same wages.  

Be Cautious

In conclusion, employers should take extra precautions when claiming the Employee Retention Credit and should be suspicious of any third-party offers that seem too good to be true. If you have questions about eligibility, calculations, or the process, you should contact us or consult with your advisor.  

For more information and regulations surrounding the ERC, employers should contact the IRS or review their website.