IRS Employee Retention Facts You Need to Know
Introduction to Employee Retention Credit
The IRS Employee Retention Credit (“ERC”) Refund Introduction
As an introduction, this video is great information for anyone thinking about applying for a credit-based IRS refund. The other eight videos include:
- Core Qualifications and Criteria for the ERC Refund
- ERC Refunds for Self-Employed People
- Can You Get an ERC Refund Without Reporting Wages?
- Getting ERC Refund After PPP Loans
- What Taxes to Amend for ERC Refunds
- Who Must Take Responsibility for an ERC Refund Claim
- Paying Percentage Fees for ERC Refund Provider Companies
- IRS Audit from ERC Refunds - What to Do
There are also additional videos on how to spot the best company to provide those services. Also, this covers what happens in cases of incorrect or misleading applications for that ERC.
Note – There are some companies that provide misleading, even sham services. Always be cautious of tax firms that will prepare and file misleading applications. These willfully filed false applications will result in IRS audits and investigations, harsh penalties, and even prison for wrongful ERC refunds. To see if you qualify for a refund from the ERC, schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.
What are the core qualifications for the ERC refund?
Does your business qualify for an IRS refund from the Employee Retention Credit? Will it be $26,000 per employee? The answer is maybe. Here are the most basic rules:
Operation Requirements - The business actually had to have been operating during 2020 or 2021, with paid and reported employees’ wages or salaries.
Certification Requirements - There are three different tests under which the business could be certified as eligible.
These include:
1) The partial or full shutdown of your business, based on a government order.
2) A reduction in your gross receipts. Business is a bit technical, because it measures your business revenues by quarter, from year to year. If you had a decline in revenues during these years, you might qualify.
3) If your business was a qualified startup recovery business during the COVID years.
Can you get ERC Refunds for your Self-Employment?
If your business does not have employees, you are not eligible for the Employee Retention Credit refund. For example, if you owned an LLC in which you were the only employee, Your self-employment is not counted towards the refundable credit. This is a similar result, that if you worked in the gig economy or the freelance economy, that compensation does not qualify for the ERC. This is the case, whether you drive for Uber or you're an attorney, and you're basically your own employee.
Other classes of compensated individuals to whom the ERC refund is not eligible include:
- Retired persons
- Employees
- Household employees
There is a lot of misleading information that encourages people to apply for this Employee Retention Credit and even receive the related refund. These applications may be subject to audit, and the refunds may be recalled by the IRS.
Can I Get an ERC Refund if I Didn't Report Wages?
Do you qualify for the employee retention credit refund (ERC) even if you did not report those quarterly employee tax returns? The answer is no. The IRS will process the application based on wages that were reported each quarter’s Form 941, Employment Tax Returns.
- If you had employees with wages, before you applied for the credit, file all Forms 941 for those otherwise eligible quarters. Keep in mind that the IRS cannot process any claim while there are any delinquent, unfiled employment tax returns.
- If you paid your employees “cash under the table”, your business would be ineligible for this same reason, and other reasons.
Special Note: Unfiled quarterly Form 941 returns are frequently tied to more serious problems with payroll back taxes. You may need to know a few quick facts. If you have either of these problems or for more questions on whether you qualify for a refund from the ERC, schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.
Can You Receive an ERC Refund After PPP Loans?
Yes, you can be eligible for the Employee Retention Credit refund, even if you received the Paycheck Protection Program (PPP) loans. You are only eligible for those wages that were not counted when you applied for the PPP loan.
Your application for the PPP loan included your wages paid for certain quarters of 2020 and 2021. For those quarters of 2021 that were not part of your PPP application, you might still be eligible for the ERC refund.
What Taxes to Amend For ERC?
Applying for an ERC refund requires that some Form 941 returns must be amended. If you applied for and received that employee retention credit, you must also amend your company’s income tax return.
You must decrease your deduction for wages paid on that year's income tax return. This would be your business’s Form 1120, 1120S, or Form 1065, even Schedule C (Form 1040), or whatever business tax return that you filed.
You have to decrease the wage deduction by the amount of that employee retention credit that you received. In some cases, this amended income tax return could result in managing additional income taxes. Please plan ahead.
Any credit refund received could be used to pay the additional tax to the IRS. However, your business can always seek a favorable payment agreement through an experienced tax attorney.
Special Note: For more questions on whether you qualify for a refund from the ERC, schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.
Who is Really Responsible For My ERC?
Yes, you will be personally responsible.
When you apply for the employee retention credit, you have to sign your name on the claim. You have to provide your own social security number. You have to provide your identity as a responsible party for
multiple reasons.
1) The IRS wants to make sure that the responsible party on the ERC refund claim is the same responsible party for the payroll taxes that were used to calculate the requested refund.
2) The IRS has received many thousands of fraudulent claims.
Identifying the applicant is one way the IRS can later determine the refund’s responsible person who should be accountable for any refund that should not have been received. If audited, the IRS will hold you accountable if your claim is not true and accurate.
Special Note: Be certain that your application is correct. To correctly determine whether you qualify for a refund from the ERC, schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.
Paying percent fees for ERC
Percentage Fees or Flat Fees?
To help you apply for the employee retention credit refund, some services require a percentage of your refund as their compensation. They may want a portion of that credit refund that they receive.
We have seen fee percentages range from 5% to 33%. Fees in the range of 15% of the refund seem to be the most common.
This method of payment is not a scam. Many legitimate companies are actually compensated that way. If you have been quoted a fair percentage and, and you otherwise have reasonable terms, this can be a legitimate arrangement.
Other national companies charge a flat, upfront fee. We have seen fees ranging from $2500 per affected quarter to $7500-$20,000 for the overall claim process. Again, if you are comfortable with the fee and other terms, this can also be a fair arrangement.
What Should I Avoid?
Be careful. The application process is complex. Watch out for companies who:
- Are overly aggressive in calculating your claim.
- Makes the process sound overly simplified.
- Say they can already tell you what's going to be your refund without reviewing your company’s financial documents.
Many of these companies will tell untrue information. Also, they will work quite aggressively to arrange as large a refund as possible. But that refund may get recalled back from an audit. You (as the responsible person) will have to pay it back. However, in most cases, you won't get back the fees that you paid for the services.
Special Note: Don’t pay an unfair fee to claim a refund from the ERC. Take a moment to schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.
ERC Audit - Next Steps
If you are audited for an ERC refund claim, it is likely that the IRS believes your claim was incorrect, or even willfully false.
The government will ask for numerous documents, as well as your own oral or written statements about your claim. Any statements will be made under penalties of perjury. Also, failure to supply documents will result in a full disallowance of the refund.
It is wise to find representation for this audit. These audits should never be handled by the person that you paid to claim the refund. Also, it is a mistake to use your tax return preparer as your representative. The best professional is an experienced tax defense lawyer.
The IRS will review each Form 941X return, to see if it was a legitimate claim. IRS will also review to see whether all of your quarterly returns and wages were reported and whether the amended return was consistent with items on the original returns,
The IRS could determine that you were not eligible for the ERC refund, as a result of the audit. In that case, you will have to pay back the refund with interest and penalties. Interest is around 7%. These IRS tax penalties will be either:
- The 20% negligence penalty, under Tax Code Section 6662(a), or
- The 75% “willful” fraud penalty, under Tax Code Section 6663.
If someone helped you to claim the ERC credit refund and was paid a fee, then you will likely not get a refund of that fee. So be careful if you're going to claim the credit.
Special Note: ERC audits are payroll tax audits. The IRS has set legal traps for you, and you should ONLY handle these audits through an experienced attorney. Take a moment to schedule a time to speak with our attorneys to determine your eligibility. Or call Tax Law Offices immediately.