The Employee Retention Credit (ERC) is a valuable tax credit that was introduced by the government to encourage businesses to retain their employees during the COVID-19 pandemic. The credit is available to eligible employers who continued to pay their employees despite experiencing a significant decline in revenue due to the pandemic.
However, applying for ERC refund can be a complicated process, and making mistakes during the application process can be costly. In this blog post, we will discuss some common mistakes that businesses make when applying for ERC refunds and provide tips on how to avoid them. By understanding these mistakes and taking steps to avoid them, you can ensure that you receive the full amount of ERC refund you are entitled to.
Mistake #1: Failing to Meet Eligibility Requirements
One of the most critical aspects of the ERC refund application process is determining whether your business meets the eligibility requirements. Eligible employers can claim a refundable tax credit of up to $7,000 per employee per quarter for wages paid between March 13, 2020, and December 31, 2021. However, many businesses make mistakes in determining their eligibility, which can result in lost time and resources.
To be eligible for ERC refund, your business must meet the following criteria:
- You must have experienced a significant decline in gross receipts: To qualify for ERC refund, your business must have experienced a significant decline in gross receipts. If your gross receipts in any calendar quarter of 2020 or 2021 were less than 50% of the gross receipts for the same quarter in 2019, you are eligible for ERC refund.
- Your business must have been fully or partially suspended due to a government order: If your business was fully or partially suspended due to a government order, you are eligible for ERC refund. For example, if your business was forced to shut down due to COVID-19 restrictions, you may be eligible for ERC refund.
- You must have fewer than 500 employees: To qualify for ERC refund, your business must have had fewer than 500 employees in 2019.
Despite the clear eligibility requirements, many businesses make mistakes when determining their eligibility for ERC refund. Some of the common mistakes businesses make include:
- Failing to meet the gross receipts test: One of the most common mistakes businesses make is failing to meet the gross receipts test. Businesses may underestimate the decline in gross receipts or fail to properly calculate their gross receipts.
- Misunderstanding the government order requirement: Some businesses may not realize that they are eligible for ERC refund because they misunderstand the government order requirement. It is important to review the government orders that were in effect during the time your business was affected by COVID-19 restrictions.
- Incorrectly calculating the number of employees: Some businesses may think they are eligible for ERC refund because they have fewer than 500 employees, but they may not be properly counting employees. For example, they may be counting part-time employees as full-time employees.
To avoid eligibility-related mistakes when applying for ERC refund, consider the following tips:
- Review the eligibility requirements carefully: Make sure to review the eligibility requirements in detail and understand what is required of your business to qualify for ERC refund.
- Keep accurate records: Keep accurate records of your business’s gross receipts, employee count, and any government orders that affected your business.
- Seek professional assistance: Consider seeking professional assistance from an accountant or tax professional to ensure that you meet the eligibility requirements and avoid any costly mistakes.
Mistake #2: Incorrectly Calculating the Credit Amount
Calculating the ERC refund amount is a crucial step in claiming the credit, and businesses must be careful to avoid errors in this process. One common mistake businesses make is incorrectly calculating the credit amount. This can lead to lost opportunities to claim the maximum refund, which can be detrimental for businesses that are struggling financially. To calculate the ERC refund amount, businesses must determine the maximum credit amount per employee for each quarter, which is based on the qualified wages and healthcare expenses paid to each employee during the period. However, businesses often make mistakes when determining the credit amount, such as failing to include all qualified wages, misunderstanding the average wage requirement, and using incorrect payroll periods. To avoid these mistakes, businesses should keep accurate records, use the correct payroll periods, and seek professional assistance if necessary. By avoiding calculation-related mistakes, businesses can ensure that they receive the full amount of ERC refund they are entitled to.
Mistake #3: Failing to Properly Document Eligibility and Credit Amount
One of the most critical aspects of claiming the ERC refund is properly documenting eligibility and credit amount. This documentation is essential for businesses to demonstrate compliance with the ERC eligibility requirements and to justify the credit amount claimed. However, many businesses make mistakes in this area, which can result in delayed refunds, penalties, and other consequences.
To avoid mistakes related to documentation, businesses must ensure that they maintain accurate records of all relevant information. This includes records of wages and healthcare expenses paid to each employee, as well as documentation demonstrating compliance with the ERC eligibility requirements. For example, businesses must be able to demonstrate that they experienced a decline in gross receipts or that their operations were fully or partially suspended due to government orders related to COVID-19.
Mistake #4: Missing the Deadline for Filing
Missing the deadline for filing is a common mistake businesses make when claiming the ERC refund. The IRS has set strict deadlines for businesses to claim the credit, and failure to meet these deadlines can result in lost opportunities to claim the maximum refund.
To avoid this mistake, businesses should be aware of the deadlines for filing and ensure that they submit their claims on time. The deadline for filing the claim for the 2020 tax year was extended to May 31, 2021, but for subsequent quarters, businesses must file the claim on a timely basis. The deadline for filing the claim for the 1st quarter of 2021 was July 31, 2021, and the deadline for filing the claim for the 2nd quarter of 2021 is October 31, 2021.
Mistake #5: Failing to Seek Professional Help
Another common mistake businesses make is assuming that they do not need professional help because they have a small business or are familiar with tax laws. However, the ERC refund is a specialized area of tax law, and businesses may require additional expertise to properly claim the credit.
To avoid this mistake, businesses should consider seeking professional assistance, regardless of their size or familiarity with tax laws. Professional help can ensure that businesses are claiming the maximum refund and that they are in compliance with all documentation and eligibility requirements.
Applying for the ERC refund can be a complex process, and businesses may make mistakes that can result in missed opportunities to claim the maximum refund. However, by being aware of the common mistakes businesses make and taking steps to avoid them, businesses can increase their chances of receiving the full amount of ERC refund they are entitled to.
To avoid the five common mistakes discussed in this article, businesses should:
- Ensure that they meet the eligibility requirements for the ERC refund.
- Correctly calculate the credit amount.
- Properly document eligibility and credit amount.
- File their claims on time and avoid missing deadlines.
- Seek professional assistance if necessary.
By following these tips, businesses can avoid common mistakes, increase their chances of receiving the full amount of ERC refund, and ensure compliance with all documentation and eligibility requirements.
Overall, the ERC refund can be a valuable opportunity for businesses to recover losses incurred during the pandemic. By avoiding common mistakes and taking advantage of this credit, businesses can strengthen their financial position and increase their chances of long-term success.