November 10, 2022
Despite the return to “normal,” many companies are still experiencing residual effects from the pandemic. While Georgia’s economy grew by 10% in March of this year, continuing supply chain issues and rising interest rates have put a damper on the encouraging news. This does not even consider the effects of the Great Resignationwhich triggered a 25% increase in the number of resignations. When coupled with the concern about a looming recession, organizations need to leverage every savings opportunity available.
While most of the pandemic-era relief programs have expired, one is still available – the Employee Retention Tax Credit (ERTC). By amending prior year payroll tax returns, an eligible company can receive up to $26,000 per employee. While compelling, the IRS has recently issued a warning about certain companies that falsely claim they can secure huge tax savings through the ERTC. Unfortunately, these claims are often misleading and result in many issues. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
What is the Employee Retention Tax Credit?
The ERTC is a COVID-era tax credit designed to help businesses that continued to pay employees during the economic disruption. When originally introduced as part of the CARES Act, the program was rolled out quickly to provide immediate assistance. Unfortunately, this meant several program changes and updates had to be issued in the ensuing months, creating confusion. However, organizations, including non-profits, that maintained payroll during shutdowns or periods of gross receipts decline most often qualify.
According to the IRS, a company is eligible to claim the ERTC if they meet one of the following criteria:
- Sustained a full or partial suspension of operations due to a government order that limited the ability to conduct business, travel, or group meetings due to COVID-19 in 2020 or the first three quarters of 2021.
- Encountered a significant decline in gross receipts during 2020, or the first three quarters of 2021.
- Qualified as a Recovery Start-Up Business during the first three quarters of 2021.
Those who qualify claim the ERTC by submitting an amended quarterly employment tax return for all eligible quarters. It is important to note that only a Recovery Start-Up Business can claim the credit in the last quarter of 2021. In addition, employers are prohibited from taking credit on wages reported as payroll costs in Paycheck Protection Program loan forgiveness calculations.
The IRS Warning
Why did the IRS recently issue a warning about third-party providers? The reason is that many business owners unfamiliar with the program’s details are being victimized by false claims that these businesses can secure a significant tax credit. In other cases, companies are being advised to claim the credit when they do not even qualify. Often, these companies take improper positions on eligibility or in the computation of the credit amount.
They are incentivized to claim a high amount because of the compensation structure. Most of these companies receive compensation in the form of a fee which is contingent on the amount of the refund. Unfortunately, they do not clarify that any wage deductions claimed on the company’s tax return must be reduced by the amount of the credit. In other words, these third parties incorrectly calculate the claim and charge a percentage of the credit up front as the fee.
This results in a costly mistake for these employers. In addition to the inflated fee, incorrectly claiming the ERC could result in taxpayers being required to repay the amount of the credit plus penalties and interest.
The Value of a CPA
How can an employer avoid such fraudulent schemes? The answer is simple. Hire a Certified Public Accountant (CPA). These professionals are trained and well-versed in countless tax laws and guidelines and remain on top of ongoing federal and state tax changes. They know how to properly leverage tax credits to identify the maximum allowable savings under established guidelines.
These professionals are required to follow a strict code of ethics and must earn a certain number of Continuing Professional Education (CPE) credits annually to maintain licensure. This reinforces the already deep technical knowledge these experienced professionals bring. It also starkly contrasts with these third-party companies, which have only been around a short while and lack any regulation.
The Employee Retention Tax Credit is a compelling savings opportunity for eligible Atlanta and Georgia companies. Since the details are complicated, it is important to work with a qualified provider (CPA) that can guide you through the process. If you have questions about the information outlined above or need assistance claiming the ERTC, Wilson Lewis can help. For additional information, call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.