Employee Retention Credit Fraud Irs

Many businesses and organizations have faced unprecedented hardships and challenges as a result of the COVID-19 pandemic. Lockdowns, social distance, health and security measures and lockdowns have caused many employers to face reduced revenue, increased expenses and disruptions in their operations.

In order to help employers retain employees and offer them health benefits in this tough time, the U.S. Government has introduced the Employee retention credit (ERC), which is a tax credit refundable that can be used by eligible employers to offset some payroll costs.

The ERC first became law in 2020 with the CARES Act. It was then extended and modified in subsequent legislations in 2021 and 2023. This article will describe what the ERC does, how it operates, and explain how to claim it.

For a brief reading of what the Employee Retention Credit or ERC is, take a look at this video from the YouTube channel “ERC Specialists”. You can also continue below to read an in-depth explanation of ERC.

What is the Employee Retention Credit? Employee Retention Credit Fraud Irs

Employee Retention Credit (ERC), a refundable tax credits, is available for tax-exempt businesses or organizations with employees that were affected in any way by the COVID-19 Pandemic. The ERC was created by the CARES Act in 2020 and was extended and modified by subsequent legislation in 2021 and 2023. The ERC aims to encourage employers to keep their workers on the payroll and provide them with health benefits during the crisis.

Main Features & Benefits

Credits are equal to a percent of the qualified wages and costs for health insurance paid to eligible employees up to a limit per employee each quarter.
The percentage and the maximum credit vary depending on how long the credit can be claimed. In 2020, 50% of the employees will be eligible for the credit, with a maximum limit of $5,000 per employee. For 2021, it is 70%. The limit is $7,000 per quarter per employee. For 2023, the percentage is 70% for the first two quarters and 40% for the last two quarters, and the limit is $10,000 per employee per quarter. Employee Retention Credit Fraud Irs
The credit is fully refundable, which means that if it exceeds the employer’s payroll tax liability the excess amount will be returned to the employer.
Employers can claim this credit if they experienced a significant decrease in gross receipts due to an order from the government relating to COVID-19. The credit can be claimed by employers who have been classified as recovery startups only until 2023.
Credits are available by submitting an amended employment return (Form 951) or by reducing deposits for employment taxes in anticipation. Employers can request an advance payment by submitting Form 7200.

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Criteria for Eligibility

To qualify as an employer for the Employee retention Credit (ERC), you must meet at least one of the two criteria below:

The employer’s business or organisation was suspended in whole or in part by a government decree due to the COVID-19, during a quarter calendar of 2020 or 21
Gross receipts of an employer for a quarter calendar in 2020 or in 2021 are less than half (for 2020) and 80% (for 2021) their gross receipts from the same period in 2019.

In addition, there is a special rule for recovery startup businesses that began operations after February 15, 2020 and have average annual gross receipts of no more than $1 million. These businesses qualify for ERC despite business suspensions or revenue decreases.

Business Suspension

An order of the government can suspend a business or an organization in full or part if it:

The order limits travel, commerce or group meetings as a result of COVID-19
The order has a direct impact on the operations of an organization or business
The order applies to all calendar quarters in 2020 and 2021

Some examples of orders from the government that could cause a business to be suspended are:

Stay-at-home orders restricting non-essential business operations
Curfews are restrictions on the hours that certain businesses can operate
Capacity limitations that reduce the amount of customers or clientele that a firm can service
Travel bans or restrictions that affect the ability of a business to transport goods or services

An employer should consider the following factors to determine if an order from a government has suspended a business in its entirety or only partially.

The nature and scope of the order and how it affects the operations of the business
The order’s duration, frequency, and alignment with the calendar quarters
The order’s impact on revenues and expenses

Revenue Drop

A business or organization is considered to have experienced a significant decline in gross receipts if:

The gross receipts from any quarter in 2020 is less than 50% its gross receipts from the same calendar quarter in 2019.
The gross receipts of any quarter in calendar 2021 were below 80% of the gross receipts in the same quarter for 2019.

Gross receipts can be defined as all the money received by an organization or business from any source during their annual accounting period, without deductions. Gross receipts consist of:

Sales of goods & services
Interest, dividends rents royalties and annuities
Donations, contributions, grants and gifts Employee Retention Credit Fraud Irs
Dues and fees for membership
Gross income from trades or businesses

To calculate and compare gross receipts for different quarters, an employer must use:

The same method of account (cash, accrual or accrual) was used in filing the federal income tax return.
The same calendar year quarters that it used to file its federal employment tax returns (Form 941) for 2019 and 2020/2021
The same sources of income that it reported on its federal income tax return for 2019

Recovery Startup Business

A startup that is in recovery can be defined as

After February 15, 2020, you can start any business or trade.
Has average annual gross receipts of no more than $1 million for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the credit is determined

The ERC is available to a recovery startup business regardless of whether or not it meets the criteria for business suspension or revenue decrease. Recovery startups are not exempt from certain rules and restrictions.

The maximum credit available per quarter is $50,000
The credit will only be available to employees who have paid wages in the third quarter and fourth of 2021
The maximum credit available for startup businesses is $250 million.

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Credit Amount and Calculation

There are different ERC rules and amounts for different employers and periods of time. The main factors that affect the ERC are:

How much the employer’s business was affected by the pandemic, either by having to close or reduce operations due to government orders or by having a big drop in income compared to 2019
The number of employees that the employer has in 2019 or 2020/2021 and whether or not they worked during the pandemic
How much did the employer pay each employee in health insurance?

Employers must complete and send IRS forms to claim ERC. The employer has to fill out the forms and show how much he paid his employees, as well their health insurance, to qualify for ERC. The IRS will check the forms and give the money to the employer. The employer may use the money in order to pay their employees’ health insurance premiums, or get refunds for their payroll tax.

The ERC is not available forever. The ERC will expire in September 2022. The employer must claim the ERC prior to its expiration or becoming unavailable. The employer must also spend the money properly and not waste any of it. Employee Retention Credit Fraud Irs

Here is more information about the ERC and its calculation.

Time Period

In 2020, 2021, & 2022, different laws were passed to introduce, amend, and terminate the ERC. The credit amount depends on the period for which you claim it. The following table summarises the main features and differences between the ERCs of each time period:

Time Period	Law	Eligible Employers	Credit Rate	Qualified Wages
2020	CARES Act	Employers with business suspension or revenue decline of more than 50%	50% of qualified wages up to $10,000 per employee per year	Wages paid from March 13 to December 31, 2020
Q1-Q3 2021	CAA and ARPA	Employers with business suspension or revenue decline of more than 20%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from January 1 to September 30, 2021
Q3-Q4 2021 (Recovery Startup Business)	ARPA	Recovery startup businesses with average annual gross receipts of no more than $1 million,	70% of qualified wages up to $10,000 per employee per quarter (subject to a $50,000 cap per quarter),	Wages paid from July 1 to December 31, 2021,
Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	ARPA and IIJA	Employers with a revenue decline of more than 90%	70% of qualified wages up to $10,000 per employee per quarter	Wages paid from October 1, 2021, to September 30, 2022

Number of Employees

The number and type of employees can affect the definition and calculation for qualified wages and health care costs. An employer is considered a small or large employer depending on the time period and the number of full-time employees (FTEs) it had in 2019. The table below summarizes the rules and thresholds for determining employer size in each time period.

Time Period	Small Employer Threshold	Large Employer Threshold
2020	Less than or equal to 100 FTEs in 2019	More than 100 FTEs in 2019
Q1-Q2 2021	Less than or equal to 500 FTEs in 2019	More than 500 FTEs in 2019
Q3-Q4 2021	Less than or equal to 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not have in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a small eligible employer if it had less than or equal to 500 FTEs in any calendar quarter beginning after June 30, 2021. For recovery startup businesses, the employer size is irrelevant. For severely financially distressed employers, the employer size is irrelevant if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q2 2021 apply.	More than 500 FTEs in any calendar quarter in either calendar year beginning after December 31, 2019, and ending before July 1, 2021. If an employer did not exist in either calendar year beginning after December 31, 2019, and ending before July 1, 2021, the employer is treated as a large eligible employer if it had more than 500 FTEs in any calendar quarter beginning after June 30, 2021.

To count FTEs for a given year or quarter, an employer must use the following steps:

Count the number of employees who worked at least 30 hours per week (or at least 130 hours per month) for each month in the year or quarter
Add up the total hours worked by all other employees (who are not counted as FTEs) for each month in the year or quarter
Divide the total hours by120and round down to the nearest whole number
Add the number of FTEs from Step One and Step Three for each month in the year or quarter
Calculate the average number of FTEs by adding up the monthly totals and dividing by 12 (for a year) or 3 (for a quarter)

Qualified Wages and Health Insurance Costs

Qualified wage is the number of wages that are paid to employees who qualify during a time when a business has been suspended or revenue has decreased. The list of qualified wages includes tips, bonuses, commissions, and severance payments, as well as sick leave, family leave, severance, and other compensation. Qualified salaries also include the costs of providing health coverage to eligible workers, including premiums, copays, deductibles, and coinsurance.

The employer size, the time period and the calculation of the qualified wage and health insurance cost will affect the calculation. The following table provides a summary of the rules for different scenarios. Employee Retention Credit Fraud Irs

Employer Size	Time Period	Qualified Wages and Health Insurance Costs	Example
Small	2020	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 80 FTEs in 2019 paid $8,000 in wages and $2,000 in health insurance costs to an employee in 2020. The employer had a revenue decline of more than 50% in Q2 2020. The qualified wages and health insurance costs for Q2 2020 are $10,000.
Small	Q1-Q3 2021	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 400 FTEs in 2019 paid $12,000 in wages and $3,000 in health insurance costs to an employee in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $15,000.
Small	Q3-Q4 2021 (Recovery Startup Business)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (subject to a $50,000 cap per quarter)	A recovery startup business that began operations in March 2020 paid $9,000 in wages and $1,000 in health insurance costs to an employee in Q3 2021. The business had average annual gross receipts of $800,000. The qualified wages and health insurance costs for Q3 2021 are $10,000.
Small	Q4 2021 – Q3 2022 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not	An employer with 600 FTEs in Q2 2019 paid $11,000 in wages and $4,000 in health insurance costs to an employee in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs for Q4 2021 are $15,000.
Large	2020	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship)	An employer with 120 FTEs in 2019 paid $10,000 in wages and $2,000 in health insurance costs to an employee who worked full-time (40 hours per week) in 2020. The employer had a business suspension due to a government order in April 2020. The employee did not work for two weeks in April 2020. The qualified wages and health insurance costs for April 2020 are $2,308 ($10,000 x2/52+$2,000 x2/52).
Large	Q1-Q3 2021	Wages and health insurance costs paid to an employee for the time that the employee did not work (up to the amount that the employee would have been paid for working an equivalent duration during the 90 days immediately preceding the period of economic hardship)	An employer with 550 FTEs in 2019 paid $15,000 in wages and $5,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q1 2021. The employer had a revenue decline of more than 20% in Q1 2021. The employee did not work for three weeks in Q1 2021. The qualified wages and health insurance costs for Q1 2021 are $5,769 ($15,000 x3/13+$5,000 x3/13).
Large	Q3-Q4 2021 (Severely Financially Distressed Employer)	All wages and health insurance costs paid to any employee, regardless of whether the employee worked or not (only if the employer had a revenue decline of more than 90%. Otherwise, the same rules as Q1-Q32021 apply.)	An employer with 700 FTEs in Q4 2019 paid $12,000 in wages and $6,000 in health insurance costs to an employee who worked full-time (40 hours per week) in Q4 2021. The employer had a revenue decline of more than 90% in Q4 2021. The qualified wages and health insurance costs

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Claim and Report Credit

The Internal Revenue Service (IRS) requires that employers claim the Employee-Retention Credit by filing a federal income tax return, Form 941, or a modified employment tax form (Form941X), with them. The employer is required to report the qualified wages, health insurance costs and credit claimed by each quarter.

Form 941

Form 941 is used by employers to report their quarterly federal tax liabilities, which includes income tax, Medicare tax, and social security tax. Form 941 is used by the employer to claim ERC for the current quarter or future. The employer can use Form 941 to:

ERC reduces taxes that employers have to deposit at the IRS.
If the ERC is greater than the tax that the employer must deposit, you can request an advance payment. Employee Retention Credit Fraud Irs
Carry forward any excess credits to future quarters

To avoid making common errors and fill out Form 941 correctly, employers should:

Use the latest Form 941, which reflects all the updates and changes made to the ERC by new laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Line 11c to report the qualified wages and health insurance costs paid to eligible employees
Use Line 13d for the credit claim amount per quarter
Line 13f should be used to report any advance payments made by the IRS.
Line 24 is the place to ask for an advance payment if you need it.
Use Line 25 to report any credit excess that can be carried over to the next quarter.
Sign and date Form 941 and attach any supporting documents or schedules

You can find some helpful tips on how to fill out Form 941 here:

Use online services (e-file or online filing) to submit Form 941, faster and with greater security.
Visit the IRS website to get the latest updates, FAQs, and guidance regarding Form 941 and ERC.
If you need clarification or assistance, contact the IRS or an accountant.

Form 941-X

Form 941-X allows you to correct mistakes or make adjustments in Form 941 that has already been filed. The employer can also claim the ERC retroactively by using Form 941X. Form 941-X can be used by the employer to: Employee Retention Credit Fraud Irs

Claim refunds or credits for taxes overpaid due to the ERC
Report additional qualified earnings and health benefits paid to eligible employee that weren’t reported on Form 941.
Correct any errors or omissions you find on Form 941, which may affect your credit claim.

Employers can avoid common mistakes by filling in Form 941X correctly.

Use the most recent version of Form 941X, which reflects any changes or updates to the ERC laws.
Use the IRS worksheets and instructions to calculate and report the ERC
Use Part 2 to indicate which lines of Form 941 are being corrected or adjusted
Use Part 3 to explain why Form 941 is being corrected or adjusted
Use Line 24 for any additional qualified wage and health insurance expenses paid to eligible workers
Use Line 25 to report any additional amount of credit claimed for each quarter
Use Line 26 to report any refund or credit requested due to claiming the ERC
Sign the form 941-X, date it and include any documents or schedules that you wish to attach.

The following are some resources and tips for filling in Form 941X.

You must file a separate 941X form for each quarter you are correcting or adjusting. Employee Retention Credit Fraud Irs
If you discover an error on Form 941 or make an adjustment, file Form 941X as soon as you can.
Updates, FAQs, and guidance about Form 941X and ERC can be found on the IRS website.
Contact the IRS or a tax professional for assistance or clarification if needed

Deadline and Statute of Limitations

The deadline for submitting Form 941 generally falls on the last calendar day of the following month. For example for Q1 (2021) (January – March), Form 941 should be submitted by April 30, 2019. Nevertheless, if the employer deposited all taxes due in a given quarter on time, they may file Form 941 before the 10th day. After the end quarter. For example, Q1 2020 (January to March) requires that Form 941 be returned by May 10, 2021. Employee Retention Credit Fraud Irs

The deadline for submitting Form 941X depends on the time period. It is generally three or two years, depending on the date when the original Form 941 has been filed. For Q1 of 2020 (January through March), the deadline for Form 941 to be filed was April 30, 2020. If an employee filed Form 941 in April 2020 and paid their tax in April 2020, the deadline to file the Form 941 X is April 30 2023. If an employer files Form 941 in April 2020 and pays the tax on June 15 2020, they have until June 15 2022 to file Form 941.

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Conclusion

Employee Retention (ERC) Credit is an important tax benefit which can help employers that were affected by COVID-19 to retain their employees, and lessen the impact the pandemic had on their organizations or businesses.

The ERC is a refundable tax credit. It varies based on time, number of employees, and amount of wages and health insurance paid to eligible employees. The ERC is claimed by filing IRS Form 941 or 941-X and reporting qualified wages, health insurance costs, and the credit amount claimed for each quarter.

This tax benefit is available to employers who meet the ERC’s eligibility criteria. The ERC cannot be claimed forever. There is a deadline to claim it and a statute that limits its use. Use the resources and tips provided in this article to ensure that you fill out your forms correctly and avoid common mistakes. You can also contact the IRS or a tax professional for assistance or clarification if needed.

The ERC can make a big difference for your business or organization and your employees. You can use it to retain employees, keep your cash flowing, and recover after a pandemic. We hope this article has helped you understand more about the ERC and how to claim it. We thank you for reading. Please stay safe.

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Employee Retention Credit Fraud Irs

What is the ERC?

Employee Retention Credit – This tax credit is available to employers for keeping their employees employed during the COVID-19 epidemic.

It was created in March of 2020 by the CARES Act and later extended and amended by the CAA Act of December 2020 (Consolidated Appropriations Act of 2021).

Are all ERC applicants eligible?

ERC eligibility is not universal. The ERC is only available to employers that have paid wages to employees between March 13, 2020, and December 31, 2021.

Below are some details about eligibility.

The business or organization was suspended (fully or partially) by government order due to the COVID-19 pandemic.
The gross receipts they had for a calendar-quarter in 2020, 2021 or both were less than 10% of their gross receipts during the same quarter last year.
These businesses are recovery startups that have been in operation since February 15, 2020. They also generate gross revenues of no more than $1 million on average per year.

How much does the ERC cost?

The amount that an organization or company receives in ERC will depend on many factors.

Among these factors are the time period, employee count, amount of qualifying wages and health insurance cost paid to eligible workers. To learn more about how ERCs are calculated, please read the article.

How to claim ERC

For an employer to claim the ERC, they must file either a federal reform of employment tax or an amended employment tax return (941-X).

The employer must provide a quarterly report detailing the wages, health insurance and other costs that are eligible for credit as well as the amount claimed.

When is the Deadline for Filing the ERC Forms?

The deadline for filing the ERC forms is different for Form 941 and Form 941-X.

The last day for Form 941 in most cases is the last month following the end each quarter. For Form 941X, the deadline is three years following the date on which the original form 941 was filed. The deadline can be two years after the date the tax was paid. However, the latter date is preferred.