Major Myths About Employee Retention Tax Credit

ERC has been proven the most effective tax policy in the CARES Act. It also has been one of the most effective entities to save a small business from the economic impact of the pandemic. Last year ERC provided employers up to $10,000 per employee.

According to an estimate, 70%-80% of small businesses are good candidates to receive the ERC, but they have not yet claimed it. So the reality is that to date, the actual number of small and medium businesses applied for the ERC goes far below expected. It leaves the billions of dollars on the table untouched. 

It is because, along with being one of the most useful tax reliefs, it is also one of the most misunderstood tax benefits. There are a lot of myths surrounding the ERC because most of the small businesses either know about it or are wrong about what they do know. So, here we will try to break these myths that have clouded the minds of the individuals who wanted to claim the credit. 

employee retention tax

Let’s move further to know more about the myths that we are going to smash in this guide- 

First Myth- 

Can A Business Claim The ERC, If It Has Received The Benefits Of The PPP? 

Many confuse the ERC and PPP as they appear to coincide with each other. However, there is a significant difference in both of these tax reliefs. And there is a possibility that an employee can receive both of them. 

Let’s get into more details- 

While it is true that no employer can use the same payroll for both PPP and ERC, it is still possible and also practical to have sufficient payroll to allow to avail both ERC and PPP benefits. 

In simple words, no employer can count the same payroll for PPP and ERC. But, if they count different payrolls, they can apply for the PPP and the ERC simultaneously.

But the situation may be a little different for the second draw of the PPP because some might question whether a business can utilize payroll paid between the second draw of PPP loans. 

The “CCA 2021” amendment allows an employer to use payroll covered during the second draw of the PPP to count for the ERC. But yet, there are complex rules that can lead to a lot of confusion. So, in that case, the best thing that an employer can do is take help from an ERC consultant. An ERC consultant can lift all of the complexities making the ERC applying and receiving process easy and stress-free. 

Second Myth- 

A Business Has To Have The Significant Declination In The Gross Receipt To Apply For The ERC

To receive the benefits, an employer has to qualify for one of these either conditions- 

  • His business is fully or partially shut down due to the government-imposed restriction. 
  • Or his business has faced a significant decline in the gross receipt compared to the previous year. 

So, it is not necessary to show a gross receipt declaration to apply for the ERC. The employer could also apply for the ERC if the business were affected by the full or partial shutdown. 

Third Myth-

The Businesses That Are Operating Can’t Apply For The ERC

In this case, an employer has to figure out whether the business is subject to a partial shutdown. There are various ways where a business can consider itself under a partial shutdown. For example, if the operational hours for a business is limited or where suppliers of an essential business were suspended due to the government orders, it is a consideration of partial shutdown. Government orders also include a curfew that potentially impacts the trade or business hours. 

Fourth Myth- 

ERC Owner Wages Can’t Be Counted For The ERC

When it comes to qualifying for the ERC, the percentage of ownership matters a lot. Because if the wages are paid more than 50%, the owners may not qualify for the credit, along with this, to check qualification for the employee retention credit owner wages, IRS also looks at the related individuals and their wages to determine whether the business can take advantage of the ERC or not. 

So, if a business has related shareholders, individuals may not qualify for the ERC. 

Related individuals include the followings- 

  • Brother, sister, stepbrother, or stepsister
  • Father, mother, grandfather, or grandmother ( or any ancestor of either) 
  • Stepfather or stepmother
  • Child or a descendant of a child
  • Niece or nephew 
  • Aunt or uncle
  • Or daughter-in-law, son-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 

Fifth Myth- 

Not Every Employee Can Be Counted For The ERC

Yes, it is somewhat true because the definition of a full-time employee is based on the Internal Revenue Code. According to the IRS, every employee who worked 30 hours per week in a month would be counted as one employee. Along with this, part-time employees can be combined with the other part-time employees for the month and divided by 130 to create a full-time employee equivalent. While it can be confusing, the business will have fewer employees because part-time employees count together to form full-time equivalent employees. There are various ERC resources to elaborate on counting a part-time employee to form a full-time employee. So, an employer can determine how many employees to count, including part-time and full-time employees. 

Sixth Myth- 

Business Must Have To Wait For The Availability Of Form 941

It’s partially true, but it is not the only way to apply for the ERC. It is a way for the business who wants to apply for the cash or advance payment of the ERC. Also, if a business has filed form number 941 to apply for the ERC, it might take 4-6 months to receive credit or a refund. So, if a business has time and can wait for that long period, they can wait for form 941. Some businesses that need advance payments of the ERC can also wait for form number 7200. 

Do You Still Need Further Help? 

The ERC is typical tax relief, which is not easy to decode. However, ERC is a great way to help small businesses. 

Suppose you are an employer and need any help with ERC financial, the best way for you to seek help. You can seek help from an ERC consultation. We can make it easier for you. ERC Experts are some of the most trustworthy consultants when it comes to the ERC. They can help you from start to finish. So, don’t hesitate to reach out.