IRS Employee Retention Credit
Find Out What Employers Need to Know about the Employee Retention Credit to Reduce Their Taxes Without Triggering IRS Scrutiny
As part of the omnibus Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Congress established a new employee retention tax credit for employers that retained their employees during the COVID-19 pandemic. The Taxpayer Certainty and Disaster Tax Relief Act made changes to the employee retention credit at the end of 2020, and there have been further changes that impact employers’ eligibility to claim the credit for the 2021 tax year. As a result, employers that claimed the credit in 2021 cannot simply carry over their credits for 2022 but instead must reassess their eligibility when calculating their quarterly estimated taxes and filing their 2022 returns next year.
Claiming the IRS Employee Retention Credit Can Present Risks for Employers
Like other COVID-19 relief programs, employers that take advantage of the employee retention credit are likely to face close scrutiny from the IRS (and potentially from other authorities as well). By various estimates, COVID-19 relief fraud has cost the federal government tens of billions of dollars, and the government is now cracking down on businesses and individuals suspected of making false and fraudulent claims. With this in mind, employers need to be very careful to ensure that they qualify before claiming the credit, and they should be prepared to substantiate their eligibility if necessary.
Qualifying for the IRS Employee Retention Credit
Part of the challenge for employers is that Congress and the IRS are continuing to make changes to the employee retention credit—mostly by extending its availability but by making some substantive changes as well. With this in mind, here are the current eligibility rules, as published by the IRS:
The employee retention credit is available only to employers that have paid “qualified wages” in 2020 or 2021. Effective January 1, 2021, qualified wages are defined as:
- For employers that averaged 500 or fewer full-time employees in 2019, qualified wages are “generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.”
- For employers that averaged more than 500 full-time employees in 2019, qualified wages are “generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.”
For 2021, employers can claim a refundable credit against their share of employees’ Social Security taxes equal to 70 percent of their qualified wages paid—which include up to $10,000 paid per employee per calendar quarter. Employers must also be able to demonstrate that they satisfy one (or both) of the following conditions:
- The employer experienced “[a] full or partial suspension of the operation of their trade or business . . . because of governmental orders limiting commerce, travel or group meetings due to COVID-19;” or,
- The employer suffered “[a] decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.” For companies started in 2020, the IRS permits the use of corresponding 2020 calendar quarter gross receipts.
Under amendments to the law, employers can claim the employee retention credit for the 2021 calendar year even if they received a Paycheck Protection Program (PPP) loan, provided that the wages covered under the credit “are not treated as payroll costs in obtaining forgiveness of the PPP loan.”
Importantly, these are just the general rules. Different types of businesses are eligible to claim more credits than others (i.e., “recovery startup businesses”), and the end date for eligibility is continuing to shift as the federal government continues to assess the economic impact of the COVID-19 pandemic. To avoid fraudulently claiming the employee retention credit, employers must ensure that they are applying the relevant set of rules for each calendar quarter.
Risks of Improperly Claiming the IRS Employee Retention Credit
Employers that improperly claim the IRS employee retention credit can face significant adverse consequences. As noted above, the IRS and other federal authorities are actively targeting businesses and individuals suspected of fraudulently claiming COVID-19 relief benefits, and this includes the employee retention credit. Depending on the circumstances involved, improper attempts to claim employee retention credits could lead to an IRS audit or an IRS CI investigation, and employers (and their owners) can potentially face fines, interest, back tax liability and even federal imprisonment.
To mitigate their risk of facing these penalties, employers seeking to claim the IRS employee retention credit should:
- Carefully ensure their eligibility to claim the employee retention credit for each calendar quarter;
- Carefully ensure that they are not claiming credits in excess of the maximum qualified wages; and,
- Maintain on-hand documentation of their eligibility (based on business size and revenue) as well as their employees’ qualified wages.
For employers and business owners that are currently facing scrutiny in relation to the IRS employee retention credit, it is imperative to engage defense counsel promptly. Even if an employer inadvertently claims employee retention credits for which it is ineligible, it can still face significant liability. But, it will often be possible to work out a favorable resolution with the IRS with the right approach. Taking the right approach requires significant experience dealing with the IRS, and this means that targeted employers and business owners need a skilled Washington DC tax attorney on their side.
Schedule a Confidential Initial Consultation With a Washington DC Tax Attorney
If you have questions about the IRS employee retention credit, or if you are currently facing a federal tax audit or investigation related to your company’s efforts to obtain refundable credits from the IRS, we encourage you to contact us promptly. To schedule a confidential initial consultation with Washington DC tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, call 202-349-4033, email email@example.com or contact us confidentially online now.
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