Key insights
- The IRS has issued a renewed warning to taxpayers not to fall for schemes related to the employee retention credit (ERC).
- Many employers may still qualify for the credit and have time to file their Form 941X — assuming they meet the eligibility test and have wages related to the credit.
- An FAQ from a recent CLA webinar on ERC, work opportunity tax credit, and other federal employment credits may help you understand your business’ eligibility to claim them.
Assess whether you qualify for the ERC or other federal tax credits.
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False claims can generate compliance risks
The IRS issued a renewed warning to taxpayers not to fall for schemes related to the employee retention credit(ERC). In this warning, the IRS reinforced its statement from October 2022 urging taxpayers to fully consider their eligibility for the credit prior to amending payroll tax returns.
The warning reminded taxpayers that incorrect claims may be subject to significant interest and penalties. The IRS also asked taxpayers and advisors to report inappropriate solicitations to the IRS Lead Development Center in the Office of Promoter Investigations.
What to consider when the IRS decides to audit your credit: The IRS can audit a credit within five years after it has been filed, and they may ask for proof of eligibility, backup of gross receipts, and proof of impact due to government orders in order to prove their safe harbor.
Still time to benefit from employment credits
Despite the bad actors and schemers, many employers may still qualify for the ERC and have time to file their Form 941X — assuming they meet the eligibility test and have wages related to the credit. To be an eligible employer, the organization must have experienced a significant decline in gross receipts or been more than nominally impacted by a government order fully or partially suspending business operations.
The deadline to file amended payroll tax returns is April 15, 2024, for the 2020 tax year and April 15, 2025, for 2021, so there is still time to consult with a trusted advisor prior to filing for and claiming the credit.
CLA recently hosted a webinar on ERCand other federal employment credits, and a summary of key questions and answers is below.
Answers to your ERC, WOTC, and other tax credit questions
Q: Some places have said if you qualify in Q1 of 2021 it automatically carries forward into Q2. I don’t read it that way. Can you help?
A: If you qualify based on a Q1 decline in gross receipts, then you automatically qualify for Q2. However, if your Q1 qualification is based on a Q4 2020 decline in receipts, then you will not automatically qualify for Q2 2021.
Q: If you received a PPP loan and it was partially forgiven, can you still apply for ERC?
A: You may qualify for both PPP and ERC if you are deemed an eligible employer; however, you may not use the same wages for PPP forgiveness and the ERC.
Q: Can you explain the 10% rule?
A: For an organization subject to a government order that limited its activity, Notice 2021-20 requires the order to have limited its ability to provide goods and services by at least 10% compared to the same period in 2019.
The limited service must be at least 10% of the overall revenue or hours in 2019, and the organization must not have pivoted to perform the service in a substantially similar way (e.g., a drive-through or via computer/virtual).
Q: Does the “gross receipts” test apply to the overall receipts of the organization? Or can it be applied by business line/contract?
A: Any of the eligibility tests must be considered for the organization in the aggregate — not just one service line or location.
Q: Do you also have to amend the prior year’s corporate tax returns?
A: The tax return for the organization must be amended in the year the credit was generated, under Notice 2021-49. If the Form 941X is amended in 2020 and another in 2021, then both the 2020 and 2021 federal income tax returns must be amended.
Q: When determining whether revenue has decreased, do you always compare to 2019? (for 2020 and 2021?)
A: The base period for eligibility comparisons is 2019, regardless of whether an organization is considering the 2020 or the 2021 credit.
Q: I heard the exam period was increased to 10 years. Do you know if this is factual?
A: The American Rescue Plan Act extended the window to five years for the IRS to review certain ERC filings.
Q: Could the work opportunity tax credit (WOTC) qualify for contracted temporary workers?
A: WOTC applies to all W-2 employees of the organization — other than an owner or their relatives — regardless of whether they are full-time, part-time, temporary, or seasonal. Rehires are not eligible for the credit.
Q: WOTC: Can you clarify what categories nonprofits qualify for?
A: Nonprofits only qualify for the Veteran categories.
Q: Federal empowerment zone (FEZ): When you say year after year do you mean that you can claim the credit on the same employee each year they are in your workforce?
A: FEZ credits may be claimed annually for the same employee assuming they meet the eligibility requirements of living and working in the zone for at least 90 days in that calendar year.
Q: What about religious organizations that don’t file tax returns?
A: Religious organizations would still pay payroll taxes, and they can claim the credit on Form 941X as a refundable payroll tax credit.
Q: Can we claim a credit for a previous hire and just amend a tax return from that period?
A: You may amend the return for FEZ; however, you will not be able to claim the WOTC credit retroactively unless you had timely filed the Form 8850 for that employee.
Q: If you meet all the tests EXCEPT gross receipts, can you still claim ERC?
A: Yes, you may claim the credit if you qualify based on a partial shutdown or if you qualify based on gross receipts, but you are not required to meet both tests.
How we can help
Taking advantage of tax credits can be a full-time job. Our CLA tax professionalswork with employers to identify eligible employees, collect supporting information, submit the required tax forms, and compute the dollar amount of the credit.
