Employers that meet the eligibility criteria have until April 15, 2024 to claim up to a $5,000 credit for each eligible employee for 2020, and until April 15, 2025 to claim up to $21,000 per eligible employee for 2021.
In response to the financial impact of the COVID-19 pandemic, the CARES Act established the Employee Retention Credit (ERC, also known as ERTC, Employee Retention Tax Credit) to encourage employers — including nonprofits — to keep employees on the payroll. The credit was expanded and increased for 2021, and subsequent legislation altered eligibility for the fourth quarter of 2021. Even though 2020 and 2021 have passed, it’s not too late for eligible employers to amend their 2020 and 2021 employment tax returns to take full advantage of the tax credit if they haven’t already.
Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within three years of the date Form 941 was filed, or two years from the date you paid the tax reported on Form 941, whichever is later. Forms 941 for a calendar year are considered by the IRS as filed on April 15 of the succeeding year if filed before that date (IRC 6501(b)(2)).
What’s the Catch?
The rules regarding eligibility are complex, including the appropriate wages to consider, interaction with other pandemic programs, and determining if any aggregation rules apply or if the business was subject to any government orders. Because of the interplay with various other programs and income tax returns, it is essential to know that in addition to filing Form(s) 941-X to amend payroll returns, amended tax returns will also need to be filed to properly account for those wages that were used in the calculation of the credit.
A business must meet specific criteria to be eligible for the ERC, such as experiencing a significant decline in gross receipts or a full or partial suspension of operations due to government orders related to the pandemic. Since the amount of the credit is based on wages paid, the business must also have retained eligible employees during the relevant payroll tax period. The ERC is calculated on a quarter-by-quarter basis and is claimed on your quarterly IRS Form 941 payroll tax return or an amended payroll Form 941-X.
Due in part to its valuable nature and the opportunity for significant false claims, the IRS has already begun to audit claims, and they have an extended time period to do so. The American Rescue Plan Act (ARPA) extended the time the IRS has to audit some ERC claims for an additional two years, for five years total.
What Should Organizations Do Now?
What organizations should do depends on where they are in the credit claim process. It’s highly recommended that entities engage knowledgeable, reputable providers to assist with compliance and documentation requirements to avoid potential penalties or worse. It is even better if your provider has the insight and resources to assist with preparing and navigating an IRS audit.
How Can Thompson Greenspon Help?
Thompson Greenspon has developed the following methodology to ensure our clients are prepared in the instance of an ERC audit or Information Document Request (IDR). We break down the ERC studies into a five-part process: eligibility analysis, documentation, calculation, filing, and (as requested) IRS audit defense.
Eligibility Analysis: Analyze your organization’s eligibility for the ERC based on your specific circumstances, such as the impact of the pandemic on your operations, revenue, and (if required) operations aggregation with other entities.
Documentation: Assistance with collecting and organizing the necessary documentation to support your ERC claim. This can include payroll records, financial statements, tax returns, and other relevant documents.
Calculation: Determine the ERC amount based on the relevant payroll tax periods. These calculations include various scenarios relevant to the legislation of each year, including coordination with other programs to include the Paycheck Protection Program loan forgiveness, alternative quarter calculations, required aggregation of businesses, and disallowance of related party wages.
Filing: Prepare and file for the ERC claim, ensuring all required forms and documentation are submitted correctly and on time, including any required amended tax returns.
IRS Audit Defense: Representation and assistance in responding to IRS inquiries and examinations and providing necessary documentation, as requested.
Thompson Greenspon has the resources, education, experience, and expertise in tax and compliance work to ensure your ERC is appropriately executed. Our thorough understanding of ERC rules and requirements allows us to ensure our clients are “audit-ready.” We can review your calculations, help prepare your documentation into an audit-ready package or provide representation and assistance in responding to IRS inquiries or examinations. Don’t hesitate to contact us and speak to one of our ERC specialists for help, even if you have already filed your claim.