What is the Employment Retention Tax Credit?
The Employee Retention Tax Credit (ERTC), also called an Employee Retention Credit (ERC), was a tax-savings incentive for businesses to retain employees during the pandemic. It helped companies reduce their payroll costs. The refundable payroll tax credit expired on October 31, 2021, but qualifying businesses can retroactively file to receive the credit for tax years 2020 and 2021.
Employee retention tax credits were first enacted under the CARES Act. The Consolidated Appropriations Act and the American Rescue Plan Act later amended the program.
Eligible employers include those that received state or federal government orders for a full or partial shutdown or experienced a decline in gross receipts by 50% or more compared to the same timeframe in 2019. Companies withhold payroll taxes to claim the employer retention tax credit.
Under the provision, eligible businesses could claim a payroll tax refund for qualified wages paid during the pandemic. The provision underwent several changes and adjustments since its initial implementation under the CARES Act. New legislation changed eligibility, allowing businesses that received PPP loans to also qualify in certain situations.
In 2020, the credit was equal to 50% of up to $10,000 in wages paid per employee for all qualifying quarters between March 13, 2020. A qualifying quarter is when there was a decline in gross receipts by 50% or greater during the same quarter in 2019. Total credits could not exceed $10,000 per employee annually.
The credit equaled 70% of up to $10,000 in qualifying wages per quarter in the first three quarters of 2021. Essentially, employers could claim up to $7,000 per employee per quarter, which equals a total of $21,000 per employee annually.
The IRS applied the credit to the employer portion of the employee’s social security tax, which was fully refundable. The credit served as an overpayment and was refunded after subtracting the employer’s share of those taxes.
How long does it take to receive an ERC Refund?
The IRS was already dealing with a backlog of ERTC requests before the slowdown. It took an average of six months to one year to receive the funds.
We don’t know how much longer it will take to receive funds with this slowdown, as it was only recently announced. But it looks like business owners can expect to wait well over a year to receive the funds now.
Why is the IRS Slowing Down the ERC process?
Per the Wall Street Journal, the IRS states it’s slowing down the process to combat fraudulent or overstated claims:
“We remain deeply concerned about small businesses being scammed and dubious Employee Retention Credit claims being submitted amid aggressive marketing to the business community,” the IRS said Tuesday. “The IRS has slowed our processing of these claims to guard against fraudulent or incorrect submissions as we work to enhance our procedures and controls to best protect small-business owners and taxpayer dollars.”
At the same time the IRS is cracking down on alleged fraud, businesses with legitimate claims will have to wait longer to receive their funds. Some in the business community are putting pressure on the IRS to process the backlog of deserved ERTC refunds.
Some businesses were relying on the ERC funds to support operations or growth. The newly announced delays in the process may leave some scrambling for alternative solutions until those funds come in.
What about Businesses that have already received ERC Funds?
As of March, the IRS had issued over $150 billion in ERTC refunds, with an estimated $220 billion through July. According to an investment bank Piper Sandler analysis, the amount is nearly triple the original congressional estimates.
The agency is going to review approved refunds for errors or fraud. If the IRS finds it issued more than a company was eligible for due to fraud or incorrect filings, the business might have to repay the refund with interest.
How can my Business Claim the ERC?
Businesses can apply for credit on wages during the active period (March 13 and 2020-September 30, 2020, for most companies). You can consult your accountant or tax pro on completing forms 941 and 941x, or we can help you file for the ERTC with a free consultation.
With over 170 pages of documentation, the ERTC can be complex and confusing to navigate. UCS has created a fast, stress-free process so businesses can receive the maximum amount available through the ERTC.
How can I get my ERTC sooner?
Several lenders and lending marketplaces (like UCS) currently offer ERTC advances. These unique financing options arose because many businesses need or would benefit from the advance sooner than the IRS can issue the funds. The need has become more pressing with the additional delays.
Financing companies offer ERTC advances so you can access and use the funds to support and grow your business. This process is essentially selling ownership of your ERTC in exchange for an advance.
When the IRS issues the ERC refund check, it goes to the lender to repay the advance. Some lenders will charge a small monthly interest rate until the check is received, while others might charge a one-time fee.
Ensure you fully understand the advance payment policy before signing over ownership of the credit.
ERTC Advance Pros & Cons
Here are the benefits and drawbacks of an ERC advance.
Pros:
- You get to access your refund sooner.
- You can use the funds to cover operational expenses.
- Potential tax deduction on interest.
Cons:
- You’ll have to pay interest on the advance.
- Must reconcile the ERC advance against the actual ERC at the end of the quarter.
- Requires extensive documentation.
How to Apply for an ERTC Advance:
Follow these steps to request advance payments for ERC through United Capital Source
Step 1: File for your ERC with the IRS
If you haven’t already done so, the first step is to file for your ERC. You can file independently, or our dedicated ERTC experts can help you complete the filing process and get the maximum credit possible.
Step 2: Gather your documents.
You’ll need the following documents when you request an ERC advance payment:
- A completed application.
- IRS Form 8821 & 7216.
- IRS Form 941 (original) and 941x (amended) for each quarter filed.
- ERC calculations.
- Documentation for ERC qualification from the filer.
- 941s for the two most recent quarters.
- Government ID for all business owners with a 20% stake or greater.
- Most recent business tax return.
- Bank statements for the previous three months.
- An adjusted employment tax return (if required).
You will also need to provide the following after approval but before funding:
- W-9 by the authorized signer(s).
- Copy of your operating agreement.
- Voided check from your business bank account.
Step 3: Complete the application.
You can download the application form or visit the application page to complete the process.
Step 4: Consult with an ERC expert.
One of our funding experts will reach out to discuss your advance payment application. The call will cover the refund amount, the timeline for receiving your advance, and any associated costs.
Step 5: Accept and get your funds.
Once we finalize the application process, you can expect to receive your funds according to the discussed timeline. Repayment occurs when we receive the ERC refund check from the IRS.
Frequently Asked Questions
Here are the most common questions about the ERC delay.
What are the deadlines to file for the ERTC?
Tax years 2020 and 2021 each have a different deadline to file.
Tax Year 2020 Deadline
The deadline to file for an ERTC for 2020 is April 15, 2024. You can file for Q2, Q3, and Q4. You cannot file for 2020 Q1 as the pandemic began at the end of the first quarter.
Tax Year 2021 Deadline
You must file your ERTC for 2021 by April 15, 2025. The deadline gives you time to gather your paperwork, but it would still be best if you filed sooner rather than later.
Who is eligible for the ERC?
The qualifications for an eligible employer depend on the period during which the qualified wages were paid. Eligible employers include private sector businesses and tax-exempt organizations.
Businesses with 100 or fewer full-time employees can claim the ERC for all wages paid during the eligible period. Businesses with more than 100 full-time employees can only claim the credit for wages paid to employees who didn’t perform services due to suspension or decline in business.
Qualifying Businesses March 13, 2020, to December 31, 2020
To qualify for the tax credit on qualified wages between March 13 and December 21, 2020, your business must have carried on trade or have been a tax-exempt organization that:
- Was ordered to partially or fully shut down by a government authority, or
- Experienced a decline of 50% or more in gross receipts for the corresponding quarter in 2019 due to COVID-19-related decline.
Qualifying Businesses January 1, 2021, to September 30, 2021
Businesses applying for the ERC for wages paid between January 1, 2021, and September 30, 2021, must meet the following conditions:
- An appropriate government authority ordered fully or partially shut down business operations or
- Experience a decline of 80% in gross receipts for the corresponding quarter in 2019 due to Covid-related decline.
Qualifying Businesses October 1, 2021, to December 31, 2021: Recovery Startup Business
Most businesses do not qualify for the ERC on wages paid during Q4 2021. The sole exception applies to recovery startup businesses. The IIJA amended section 3134 of the Internal Revenue Code to exclude all companies except recovery startups as defined in section 3134(c)(5).
If you reduced employment tax deposits for Q4 2021 wages on or before December 20, 2021, consult with your tax professional to see if you are exempt from the “failure to deposit” penalty or not.
What is a Recovery Startup Business?
Recovery startup businesses are defined in the American Rescue Plan Act. It refers to any business that opened its doors during the pandemic and meets the following conditions:
- The business opened on or after February 15, 2020.
- The business’s gross receipts don’t exceed $1 million for the individual tax years of 2020 and 2021.
- The business has 1 or more W2 employees, not including owner-operators or family members.
If a business began during Q2 of 2021, it could not claim the credit for any portion of 2020 or the first two quarters of 2021. If you acquired an existing company on or after February 15, 2021, you may or may not qualify for the ERC, depending on several factors.
Should I avoid using an ERC Advisory Service?
The IRS crackdown on ERC requests is partly to rein in the recently emerged cottage industry of Employment Retention Tax Credit advisors. That might give you pause about using such services.
It’s important to remember that not all ERC firms are the same. Some are less scrupulous and might try to pressure businesses into filing false claims. For example, the IRS said some firms filed ERC claims based on supply-chain disruptions.
You should also be wary of companies that ask for an upfront fee before you know if you’ll get the refund. However, there are many legitimate services that can help you navigate the complex rules.
Look for ERC advisors that employ CPAs, have an excellent online reputation, and only take payment when you’re approved for and receive the funds.
Why does it take so long to receive ERC Funds?
The time it took to receive an ERC was already delayed due to several factors. With the IRS slowing down the process, it will likely take much longer.
Employee Retention Tax Credits are sometimes called “America’s best-kept secret.” That’s because Paycheck Protection Program (PPP) loans got most of the attention from business owners.
ERTC was the lesser-known option. Per the National Federation of Independent Business (NFIB), only 4% of small business owners are familiar with the refundable tax credit.
However, now that PPP loans are expired, and recent legislation allows businesses that received PPP loans to file for ERTC, more companies are applying for the credit. As a result, the IRS has a backlog of requests, which has prolonged the turnaround time.
Any filing errors can also cause delays. For example, if you forgot to deduct PPP loan forgiveness, it can take over 12 months to correct the filing and receive your money.
Does the IRS offer any options for an ERC Advance?
The IRS allowed for certain advance payments during the COVID-19 pandemic using Form 7200. However, it stopped accepting Form 7200 after January 31, 2022.
Since businesses could no longer receive advance payments from the IRS, private lenders, and some hedge funds began to offer advances for employer credits. They filled the gap with Employee Retention Credit advance payment.
The advance fee structures for hedge funds are currently higher than fees from direct lenders.
What are Business Funding options while I wait for the ERTC?
Businesses left in the lurch waiting for ERC funds might be interested in the following small business funding options:
- Bad credit business loans.
- Business lines of credit.
- Business loans for women.
- Business terms loans.
- Equipment financing.
- Invoice factoring.
- Merchant cash advances.
- Revenue-based Business loans.
- SBA loans.
- Working capital loans.
IRS Slows Down ERC Refunds – Final Thoughts
The announcement of slowing down refunds for the Employment Retention Tax Credit further complicates what was already a complicated policy. Businesses relying on that money now must find other ways to fund their business until they receive their refunds.
It can be especially frustrating for businesses that filed correctly and have a legitimate claim. Some might feel they’re being punished for those that exaggerated claims or committed fraud, and the IRS for not taking more actions to combat the issues sooner.
Fortunately, small business owners still have options to gain the necessary funding despite the increased ERC delay. Several lenders offer ERC advances, or you can pursue alternative business funding solutions.
Contact us if you have more questions about filing for the ERC or getting an ERC advance. Our business funding experts can also help you with applying for a small business loan.
