The Employee Retention Credit (ERC) is one of the largest tax credit programs for business relief provided by Congress during the COVID-19 pandemic and could provide thousands of dollars to support your business through the detrimental impacts of the pandemic. This credit is complex and requires an extensive, well-developed process to prove and document eligibility and remain compliant. However, in spite of its complexity, employers should seriously consider this credit as it could be worth as much as $26,000 per employee spanning 6 quarters of 2020 and 2021.
Many vendors make large, generic promises regarding the eligibility and value of the credit, but then waffle in their deliveries and substantiation. For this reason, you should consider these four questions to ask an ERC provider to improve the success and compliance of your claim with the IRS.
Background on the Employee Retention Credit
Before speaking with a third-party ERC provider to manage your claim, it is important to understand the background and purpose of this tax credit. The program was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, encouraging businesses to keep employees on their payroll by providing a refundable payroll tax credit to offset the cost of certain wages. Originally, the CARES Act prohibited employers from receiving both a Paycheck Protection Program (PPP) loan and the ERC, but this provision was amended to allow businesses to claim the ERC even if they received a PPP loan.
The final update to the ERC was the Infrastructure Investment and Jobs Act which ended this program in November 2021, limiting the credit to the 2nd, 3rd, and 4th quarters of 2020 and the 1st, 2nd, and 3rd quarters of 2021. However, even though the credit expired after Q3 of 2021, businesses can still retroactively claim the ERC for eligible quarters if they match the right criteria. Many businesses choose to outsource filing this claim as the process can be complex and eligibility may be difficult to determine on their own. Before deciding on an ERC provider, ask these questions.
1. How long has your provider been in the tax credit market?
While many have a working knowledge of the ERC, some companies may not have a history of supporting employers in claiming tax credits and working with the IRS to sustain tax credits. No firm can say they were managing ERC claims prior to 2020, but reputable firms have been supporting clients in other tax credits similar to the ERC. Additionally, the longevity of a provider may be important to consider. You should be concerned if ERC is their only business Will this vendor be around in 2 or 3 years? Will this vendor be available to support you in the event of an IRS audit of your credit or is the vendor only motivated to help you claim the credit now with no concern for the future?
2. How do you prove my eligibility?
This is the most important question to ask. Experian Employer Services conducts an extensive process to determine and document eligibility and is something we perform prior to calculating any credit. We look at both qualification methods (gross receipts decline and partial suspension of operations) and gather data from internal and external sources to sustain any claims. Any conclusions are documented in the file based on expectations of what an IRS auditor will likely need to see in the event of an audit.
3. Is your provider looking at the aggregate group?
This credit, if done correctly, requires the entire aggregate group to be considered when determining a decline in gross receipts or the number of full-time employees. Although filed on form 941X on a per entity basis, the ERC requires that the aggregate group (as defined by the Internal Revenue Code and Treasury Regulations) be considered. For example, if two or more entities share common ownership, they may be considered a single employer when determining key aspects and requirements of the ERC. This may come as a surprise to many people seeking the credit, as the PPP used affiliation rules provided by the Small Business Association whereas the ERC applies the Internal Revenue Code definition of aggregation. The standards are similar but different. This is a common pitfall when looking to capture this credit.
4. Do you consider my full-time employees vs part-time employees?
One of the first steps in the process is looking at employee counts in order to determine whether an employer is considered a large or small employer, specifically what your employee counts were in 2019. Many people think that because large employer or small employer status is based on full-time employees alone, the credit only applies to full-time employees and will calculate it as such. When doing so across a large part-time population, this could be leaving valuable dollars on the table. Furthermore, if the analysis is done incorrectly when determining large or small employer, the calculation could be completely incorrect.
Managing Your Employee Retention Credit Claim
Not only are these questions important to ask any ERC provider, they also shed light on the complexities of the tax credit and explain why many businesses overlook this powerful financial opportunity. Experian Employer Services takes a holistic approach to the ERC, helping the client every step of the way. Starting from initial qualification and to delivery of calculation, we work in tandem to ensure that the Employee Retention Tax Credit is understandable and comprehensive. The most important step determining eligibility starts with basic, fundamental information. If you are interested in learning more about ERC, you can start with this form at Experian Employer Services.