In the wake of the COVID-19 pandemic, governments worldwide introduced various economic relief measures to support businesses and workers. One such measure was the Employee Retention Credit (ERC) in the United States. As the economy continues its recovery, House lawmakers are now scrutinizing the effectiveness and implications of the ERC, assessing its impact on businesses and employees. Optima Tax Relief explains the growing concerns over the Employee Retention Credit.
The Employee Retention Credit Explained
The Employee Retention Credit was designed to provide financial relief to businesses that faced economic hardships due to the pandemic. Eligible employers could claim a tax credit for a portion of wages paid to employees, encouraging them to retain their workforce even in the face of reduced business activity. The ERC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and has been subsequently extended and modified by other legislation. The Employee Retention Credit allows employers to claim a refundable tax credit against their employment taxes, which can then be used to reduce their tax liability or even result in a cash refund.
To be eligible for the ERC, businesses must meet specific criteria, which can include experiencing a significant decline in gross receipts or being subject to government-mandated shutdowns due to COVID-19. The ERC initially covered 50% of qualified wages paid to eligible employees, up to a certain limit, for each quarter. This percentage and limit have varied with different legislative changes. Qualified wages are those paid to employees who are retained during the designated periods, even if they are not actively working due to reduced hours or business closures. The credit can apply to both full-time and part-time employees. The ERC is a refundable credit, which means that if the credit exceeds the employer’s employment tax liability, the excess can be refunded to the employer. The ERC provisions have been modified and extended several times since its introduction in the CARES Act, so it’s important to review the most recent guidance to understand the current rules and eligibility criteria.
It has become clear that many small businesses have wrongly claimed the ERC, either now or in the past. There are still businesses amending COVID-era tax returns and claiming the tax credit. To worsen the situation, there are many scammers encouraging businesses to claim the tax credit even if they do not qualify for it. The IRS has received over 2.5 million Employee Retention Credit claims since its inception and is still processing many of the claims that came from amended returns. Their worry is that many businesses have received the credit quickly but after review, the IRS could potentially audit these same businesses and identify falsely claimed ERC claims.
The trend of falsely claimed Employee Retention Credits has quickly become a problem, even earning a spot on the IRS’s “Dirty Dozen” list of most common tax scams circulating this year. This is especially true as many scammers are marketing misleading messages about who qualifies for the ERC. The IRS is giving small businesses until April 15, 2024, to amend their 2020 tax returns and until April 15, 2025, to amend their 2021 tax returns. The IRS worries that they will continue to see an increase in fraudulent claims of the ERC until these deadlines are reached.
Input from Stakeholders
As part of the scrutiny process, lawmakers are engaging with businesses, industry experts, and economists to gather insights into the real-world impact of the ERC. This input will help guide decisions regarding the future of the tax credit and its potential modifications.
The examination of the Employee Retention Credit by House lawmakers reflects the ongoing efforts to evaluate and adapt economic relief measures introduced during the pandemic. As the economy moves towards recovery, it is crucial to assess the effectiveness, equity, and long-term implications of such measures. The discussions surrounding the ERC highlight the delicate balance between providing support to businesses and workers and ensuring fiscal responsibility. The outcomes of these deliberations will shape the trajectory of economic policies in the post-pandemic era.