If you’re cautious about reacting to emails and online messages promising incredible offers or tax refund opportunities, good for you. It’s prudent to be careful. But if you’ve dismissed something known as ERC as being too good to be true, you may miss out on a significant refund that requires minimal effort to collect.
Many business owners have received solicitations about ERC, which stands for the Employee Retention Credit. Also billed as the Employee Retention Tax Credit or Payroll Tax Refund, it’s a legitimate tax refund that was part of the CARES Act. Congress enacted it to help small and medium-sized businesses that suffered economic harm related to the Covid pandemic during 2020 and/or 2021.
Unlike much of the earlier federal Covid relief, the ERC is not a loan. It’s a tax refund that’s payable in cash -- and it’s completely legitimate. If your business previously received a Paycheck Protection Program (PPP) loan or other Covid relief, there’s a very good chance you automatically qualify for a generous ERC refund.
How generous? The legislation allows eligible employers to claim a refund for the employer-paid portion of Social Security taxes that’s equal to 70 percent of “qualified” wages they paid to their employees between March 2020 and December 2021. The computation of the credit amount is complex and depends upon a variety of factors, and I don’t have space to cover all the details here, but as I write this, qualifying companies may claim up to $26,000 per W2 employee.
The ERC is available to businesses and non-profits with up to 500 employees. When it was first offered, it carried a requirement that only businesses that had experienced a significant Covid-related decline in sales could apply.
The government made big changes to the rules in 2021, when they made companies that experienced a broad variety of Covid-related impacts eligible. Examples of those impacts included supply chain interruptions, higher costs of goods, and difficulty traveling to business meetings and conferences. Most important, they also extended eligibility to companies that had received PPP funds.
It's clear that many business owners who have heard about ERC have investigated the credit, found outdated information, and assumed their companies are ineligible. If you operate a small to medium-sized business, have a federal EIN number, pay federal payroll taxes, and meet the qualifications described above -- such as having received a PPP loan -- there’s a good chance you can obtain this refund.
Applying for the ERC is remarkably simple. When completing the IRS application, you will need your IRS form 941, monthly payroll ledgers, monthly group healthcare statements, and PPP loan forgiveness applications if applicable. In addition to businesses, private schools, churches, museums, and other non-profits (but not municipalities) may be eligible for this program.
However, time is of the essence. The ERC program ends in 2024, and maximum refund will start to drop from the current $26,000 per employee level in less than a year. That maximum will be reduced every quarter until the program shuts down, so waiting to apply means you’ll end up with a smaller refund.
Even though the ERC is a legitimate opportunity, be careful how you pursue it, because there are plenty of scammers eager to use confusion about the refund to take advantage of you or gain access to sensitive data. The safest approach is to partner with a reputable firm you trust. For example, our bank has created a portal through which we help our commercial customers and other businesses handle the claims process. It’s also a good idea to check with your company’s CPA about your eligibility.
You won’t know whether you qualify unless you investigate further and apply. If you qualify but don’t apply, you’re leaving money on the table. At up to $26,000 per employee, that’s a whole lot of money. And again, this is a tax refund paid in cash -- not a deduction, a credit reducing income, or a loan that will have to be repaid.
Check with your tax preparer today to see whether you can take advantage of this limited-time opportunity. You can also reach out to us to start the application process or even check your eligibility. We’ll be happy to help you get the refund you deserve.
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Karen Gregerson is President & CEO of The Farmers Bank, a locally owned and operating bank with 11 banking offices in Central Indiana.
The Farmers Bank is a $800 million asset organization chartered in 1876 with headquarters in Frankfort, IN. The Farmers Bank is locally owned and operated with 11 banking offices located in Central Indiana providing retail, business, investment & trust services, mortgage, and electronic banking services. Member FDIC, Equal Housing Lender.