Can Employers Claim an Employee Retention Credit on Payroll Taxes?

 Posted on May 16, 2023 in Taxation Law

There are numerous different types of tax credits and deductions that may be available to small business owners, and these can be essential methods of minimizing a business's tax burden and ensuring that a company can continue operating successfully. Business owners should be aware of the types of employment tax credits they may be able to use, as well as the potential penalties they could face if they do not claim these credits correctly. One concern that has risen recently is related to the Employee Retention Credit (ERC), which has been highlighted by the IRS as a potential avenue for tax scams.

What Is the Employee Retention Credit?

During the COVID-19 pandemic, a variety of measures was put in place to provide assistance for businesses that were forced to shut down or experienced other issues that led to losses of revenue. One of these was the Employee Retention Credit, which was a payroll tax credit that was available in the tax years of 2020 and 2021. It allowed employers to receive a credit for a percentage of qualified wages paid to employees, with a maximum credit of $5,000 per employee in 2020 and $7,000 per employee per quarter in 2021.

The ERC was limited to specific businesses that were affected by the pandemic. These included businesses that were required to fully or partially suspend operations due to government orders, businesses that experienced declines in gross receipts in 2020 or during the first three quarters of 2021, and businesses that met the qualifications to be considered recovery startup businesses in the third and fourth quarters of 2021.

The IRS has provided warnings about schemes claiming that businesses can claim the ERC on taxes for 2022 or stating that all businesses can qualify for this credit. Since this option was only available for certain types of businesses in 2020 and 2021, businesses that attempt to claim the Employee Retention Credit may be subject to tax audits. If the IRS determines that a business improperly claimed tax credits, the business may be required to repay the amount of the credit, as well as any penalties or interest that may apply.

It should also be noted that businesses that were eligible for the Employee Retention Credit in 2020 or 2021 but did not claim this credit when filing their taxes may still be able to utilize the credit by filing an adjusted quarterly tax return. They can do so by filing Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund). This may allow a business to receive a refund for payroll taxes paid in 2020 or 2021 or an abatement of penalties that may have been assessed.

Contact Our San Jose Employment Tax Attorney

Employers need to be aware of the tax credits they may be able to claim, but they will also need to be careful to ensure that they are eligible for specific credits. Errors made on a tax return or credits that were claimed improperly may lead to tax audits and penalties. At John D. Teter Law Offices, we provide assistance for small business owners and other employers who need to address tax issues. We can assist with audits by the IRS or the California Employment Development Department, and we can help business owners determine their options for reducing the taxes they may owe and avoiding or minimizing tax penalties. Contact our San Jose, CA payroll tax lawyer today at 408-866-1810 to schedule a consultation.

Sources:

https://www.irs.gov/newsroom/national-small-business-week-advice-from-the-irs-plan-now-to-take-advantage-of-new-and-existing-tax-benefits-prepare-for-reporting-changes

https://www.irs.gov/newsroom/irs-opens-2023-dirty-dozen-with-warning-about-employee-retention-credit-claims-increased-scrutiny-follows-aggressive-promoters-making-offers-too-good-to-be-true

https://www.irs.gov/coronavirus/employee-retention-credit