The Employee Retention Credit (ERC) is a valuable tax credit offered by the IRS to assist small businesses in retaining their employees during challenging economic conditions, such as those caused by the COVID-19 pandemic. While the ERC can provide much-needed relief to eligible businesses, it’s important to ensure that you are claiming the credit correctly to avoid potential penalties.
Background on the ERC
The ERC was introduced as part of the CARES Act in March 2020 and has been expanded and modified several times since then. The credit is designed to help eligible businesses retain employees by providing a refundable tax credit of up to 70% of qualified wages paid to employees, up to a maximum credit of $5,000 per employee per calendar quarter.
You may like to read the ERC FAQ.
Eligibility for the ERC
To be eligible for the ERC, your business must have experienced one of two scenarios:
- Your business was fully or partially suspended due to a government order related to COVID-19, OR
- Your business experienced a significant decline in gross receipts, generally defined as a decline of 20% or more in gross receipts compared to the same calendar quarter in the prior year.
If your business meets either of these eligibility criteria, you may be able to claim the ERC for qualified wages paid.
Penalties for Incorrectly Claiming the ERC
If you claim the ERC incorrectly, you may be subject to penalties, including:
- Penalties for understatement of tax: If you claim the ERC incorrectly and underpay your taxes as a result, you may be subject to penalties for understatement of tax. These penalties can vary depending on the severity and duration of the underpayment.
- Penalties for negligence or intentional disregard: If the IRS determines that you claimed the ERC incorrectly due to negligence or intentional disregard of the law, you may be subject to penalties of up to 20% of the underpayment of tax.
- Penalties for fraud: If the IRS determines that you claimed the ERC fraudulently, you may be subject to significant penalties, including fines and possible criminal charges.
Avoiding ERC Penalties
To avoid penalties for incorrectly claiming the ERC, it’s important to ensure that you are eligible for the credit and that you are claiming it correctly. This may involve consulting with a tax professional or reviewing the IRS guidance on the ERC to ensure that you are meeting all of the eligibility requirements and properly calculating your credit.
Must check the Employee Retention Credit FAQs to understand it better!
The Employee Retention Credit can provide valuable relief to eligible businesses struggling to retain their employees during the pandemic. However, it’s important to ensure that you are claiming the credit correctly to avoid potential penalties. By staying informed and taking the necessary steps to ensure that you are eligible and correctly claiming the ERC, you can maximize your relief and avoid costly penalties.