The Employee Retention Credit (ERC) introduced through the CARES Act provides businesses in the United States with a valuable tool to reduce costs, cut taxes, and bring back employees during the challenging times caused by the Coronavirus pandemic. However, due to the complex nature of the ERC and the frequently changing guidelines surrounding it, many business owners and their advisors often miss out on the credit or make mistakes that limit their ability to fully take advantage of its benefits. To ensure you maximize the ERC, it’s important to understand the rules and regulations associated with it. Let’s delve into the top ten mistakes business owners and their advisors make with the ERC and how to avoid them:
- Not Maintaining Separate Employee Counts: To accurately determine eligibility for the ERC, it is crucial to maintain separate employee counts based on their location. Failing to do so can result in businesses missing out on the credit for eligible employees.
- Failing to Meet the Qualifications: The ERC requires businesses to meet four qualifications. First, they need to demonstrate a decline in gross receipts for a calendar quarter compared to the same quarter in either 2019 or 2020. Second, businesses must show a full or partial suspension of operations due to government orders or health and safety guidelines. Third, they should not have received Paycheck Protection Program loans. Lastly, employers must prove that they have reduced employee hours or wages by more than 25% in the same quarter.
- Not Claiming the Credit Accurately: The ERC is complex, and one common mistake is not claiming the credit accurately. For instance, if a business reduces employees’ hours by more than 25% for two consecutive quarters but fails to claim the ERC for both quarters, they will miss out on the second part of the credit.
- Failing to Calculate the Credit Properly: Calculating the employee retention credit can be challenging, and failing to do so correctly can lead to businesses inadvertently shortchanging themselves during tax season. It is crucial for businesses to learn when they qualify, understand which wages can be included, and correctly calculate their credit amount.
- Not Tracking Payments Accurately: Accurate tracking of payments is essential for businesses claiming the payroll tax credit. This includes diligently tracking wages and payments made to employees, as these details are necessary for calculating the ERC accurately.
- Missing Opportunities Due to Recordkeeping Errors: Detailed recordkeeping of employees’ wages and payments is crucial to qualify for the ERC. Failure to maintain accurate records can result in businesses missing out on the credit they are entitled to.
- Not Leveraging the Tax Benefits of Group Employees: Businesses that employ a significant number of part-time and seasonal employees can take advantage of the ERC by claiming the credit for these employees. Doing so can result in considerable tax benefits and should not be overlooked.
- Failing to File on Time: Timely filing is of utmost importance to claim the ERC. Businesses should ensure they file the necessary forms by the deadline to avoid missing out on the credit.
- Not Coordinating with Tax Preparers: Close coordination with tax preparers is vital to stay updated on ERC filing requirements. Regular communication with tax professionals helps avoid late filing fees and ensures accurate and timely filings.
- Not Taking Advantage of Online Resources: The Treasury Department provides free online tools that can assist businesses in accurately calculating the ERC and ensuring precision when filing. Utilizing these resources can help businesses avoid costly mistakes during the filing process and maximize their credit amount.
By taking the time to understand the rules, regulations, and guidelines associated with the ERC, businesses can save money and fully capitalize on the benefits the credit provides. Avoiding the aforementioned mistakes through careful planning, research, and collaboration with professionals will help businesses navigate the ERC