Demystifying the Employee Retention Credit: Guide, Qualifications, and Fraud Prevention

While we strive to provide accurate and up-to-date financial and tax information , nothing you hear on this podcast should be considered as financial advice specifically for you or your business . We're here to share general knowledge and experiences , not to replace the tailored advice you get from a professional financial advisor or tax consultant .

We strongly recommend you seeking individualized advice before making any significant financial decision . This is Daniel , the founder of Bookkeeping for Painters .

So they will not be processing any new returns until January 1st of 2024 at the earliest .

And they have also shifted their focus from basically cranking these out and getting the checks out as fast as possible to doing a little bit more verification on the front end and making sure that these claims are valid claims , they're appropriate , and then sending the money out .

That encourages businesses impacted by COVID-19 pandemic to keep their their employees on payroll . So this is going back to when those shutdowns were happening , back in 2020 and maybe a little bit in 2021 , kind of helping those small businesses that had to basically keep their folks employed in that period while also being shut down .

The latest numbers are about 600,000 unprocessed claims as of September 15 , and 15% of those claims have come within the last 30 days . And the reason behind this , the driving force is and you , if you have a business , you already , you've already seen this it is the onslaught of advertisements from companies claiming to get you ERC .

And I mean I've in my own home , I've seen mailers come in my mailbox . I've gotten voicemails on my phone . I've seen you know celebrities on TV .

Now , it's almost certainly an AI fraud , but imagine getting a phone call from Snoop Dogg encouraging you to apply for the ERC . So yeah , this is this is kind of jumped the shark . This is this is almost become like a like a pop culture meme .

But the result is the IRS is getting flooded with claims and you can imagine companies that will use , you know , deep fakes of celebrities to sell their products may not be very diligent in processing their claims .

They may not be , you know , real accurate as to what qualifies and what doesn't qualify , and that could leave you , the business owner , on the hook if you received money that you weren't actually entitled to .

But I think you know some of these firms or businesses are kind of bending the rules and or just downright fraud to get access to that . So it's definitely important to get what you're entitled for , if you actually will go through the requirements here on the podcast of what it takes to qualify .

But if you don't qualify , definitely don't recommend you trying to get this credit because IRS is well aware of the fraud going on and they're most likely going to investigate it . So you want to be , you know , on the right side of things here .

So should we talk a little bit about how we can know if we qualify for it and , kind of you know , set the standard there ?

And then you have to have a couple of one of the following things need to have happened . One , the first possibility thing is that you had a reduction in your tax basis revenue relative to a reference quarter or like a prior year . So , for example , your tax basis revenue went down in 2020 compared to 2019 or in 2021 , it went down compared to 2019 .

Basically , did your revenue go down compared to pre-COVID so that if that happened to you , you could potentially qualify for this . Now , in the painting industry , a lot of folks didn't have this happen . They had a lot of folks had their income , their revenue , go up in 2020 and 2021 .

So we saw that influx of people just hanging out at their house and they're like , hey , we should paint the exterior of our house . So they're saying influx of those home improvement things going on . But it might apply to you . So that's the first thing .

And the second one is that you'll have to have some sort of full or partial government shutdown and because of that shutdown , that impacted you in a more than nominal way . You're impacted your business in a more than nominal way that prevented you from doing your normal operations .

So and there has to be a government order associated with that government shutdown so it has either impacted your business directly because you literally couldn't go out and do painting you couldn't do interior painting , for example , because there was a shutdown in your county that said that there was to be no interior painting or no contractors allowed to go inside of

buildings for a period of time . Or it could be because your vendor was shut down and you were unable to get the resources that you needed to do your job .

So maybe you went you know , ppg the only local paint shop was PPG and they were shut down and you were unable to get paint , the key being that there was no other paint stores that you could have got paint at , so there cannot have been a replacement . So , basically , number one , did you have your tax basis revenue go down in relative to like 2019 ?

Or did you have some sort of full or partial government shutdown that impacted your operation so you couldn't do interior painting , for example , or one of your service lines , or you were unable to get , you know , paint or some sort of product that you need from your supplier because of that shutdown .

You know , we are encouraging people to stay at home is not a shutdown , or we are requiring people to wear masks when they go outside is not a shutdown .

So these shutdowns did occur , mostly in the second quarter of 2020 , when COVID was at its prime , and most of them were lifted , you know , relatively quickly , and we kind of moved into that yellow area of we'll use caution and wear a mask , but you can go outside .

So , you know , we want to make sure that we can actually document the executive order or the document that shows the shutdown .

If you go online and I might put this in the show notes , but there's , there's some resources out there . If you're not , you don't remember .

If there's a government shutdown , there's some websites that have kept track of what counties and states had those shutdowns and they have the actual document that says because you'll actually have to find the document and then there's usually some sort of appendix that specifies all the types of businesses that are shut down or not shut down .

And so , just to take an example for Pennsylvania , they did have a shutdown that shut down building finishing contractors for a period of time and they were unable to do work in that area , so that you'll have to find the government order and then the appendix that shows that , okay , building finishing contractors or painting contractors were unable to do work for

this period of time . And so those you can either go to your , your state website or they . There's some like Nat law review . Calm has some lists of those shutdown orders .

So I think for the the three quarters in 2020 , where this was available , sets on q2 , q3 and q4 , or like April through December of 2020 , you need to show a 50% or greater decline in gross revenue from the same quarter in 2019 . If you can show that , you could qualify for ERC in 2021 for , like January through the end of September , the decline wasn't .

It wasn't that , it was actually less strict . So 20% decline was sufficient to show you know that you qualified for ERC , but again , it's quarter by quarter , so you know if you qualify for one quarter you may not qualify for the other quarters , but you only want to apply for those quarters in which you did have the decline or the government shutdown .

It's just you just need to make sure what you're trying to qualify for is actually what happened , and making sure you have the right documentation to prove that .

If you are a more than 50% owner of the business , you may be a shareholder employee , but if you're more than a 50% owner , then you can't be qualified as one of the employees that the ERC is calculated on .

And then , of course , they do need to be actual employees and not contractors , so they need to be paid on a W2 , not a 1099 to qualify for the ERC .

Documentation meaning you can prove with your revenue , you have financial statements that can basically show that you did have a decrease by the stated percentages we talked about 50% and 20% or you have that government order to back up the ERC claim . What are some other pitfalls that we should be looking out for for this ERC stuff ?

So because you received a credit for those wages , you can't also deduct those wages on your 2020 and 2021 returns . So now you have to go back and amend those returns , removing the wage deduction that you received the credit for . When you do that , your profit goes up , because your expenses have been reduced . When your profit goes up , your taxes go up .

So while the ERC itself is not taxable , the effect it has on previous year's tax returns will probably result in some tax being owed . It's going to be much less than the ERC itself . You will come out ahead , but you're going to want to make sure you amend those returns and pay those taxes so that you can avoid an examination .

Now what happens if maybe you've already submitted for the ERC and you're listening to this and you're like , oh crap , I submitted for all six quarters and now I'm getting a $200,000 check in the mail from the IRS , but I probably only qualified for half of it or something . What should folks do in that situation ?

So in that situation , one , I would suggest finding some competent help , a competent accountant , enrolled agent , cpa , who can help walk you through the process , make sure that you actually got your numbers right and then at that point you can amend your payroll tax returns , again showing the proper amount of credit and then paying back the excess that you received .

Now , if you do this , if you take a proactive approach to it and you get to it before the IRS does , then there may be a little bit of interest , but there won't be significant penalties .

If you wait for the IRS to catch it and while the IRS normally has three years to figure these things out , with the ERC that's actually been extended to , I believe , five years , so they have extra time if you let the IRS catch it , then you run the risk of accuracy-related penalties , higher interest . It's much worse if the IRS catches it .

So if you're in that situation , my recommendation is be proactive amend the returns , pay back the excess and you'll sleep better at night .

So that would be a lot worse penalties as opposed to just like an accuracy or you just miscalculated something .

So if they claim fraud , they have as much time as they want to come after you and there will probably be some people who probably not anyone listening to our podcast , but there are going to be some companies who really get the book thrown at them . The IRS has already done 250 criminal prosecutions for ERC fraud and they are just getting started .

So the IRS and Congress knows that this program has been abused and they are definitely putting it under a magnifying glass . They will go after the bigger fish , the low hanging fruit , first . But if you think that maybe your small company has accidentally taken a little bit more than it should , I would advise trying to get that rectified . Nip it in the bud .

If you catch it before the IRS does , things go a lot better for you .

It's just you gotta make sure you go in knowing , knowing the pitfalls and making sure you're covered .

The people who are getting criminal prosecutions are the ones who have no employees , who are just making things up and you know , and scamming the government , and we should want to see these people prosecuted because it's our taxpayer money that's being abused and we want it to be put to the right use . So , if you qualify , by all means go and get your credit .

If you haven't filed yet , be patient . I say go ahead and get it in . Don't wait till next year . Just realize it's gonna take a while for it to get processed . If you've already got your credit and you have gotten the correct amount , make sure you amend your 2020 and or 2021 returns so that you kind of tie up that loose end .

And if you are in the unfortunate situation where you think you may have taken too much , go ahead and fix that . Amend those returns . And so you know this is not doom and gloom . There is a way forward in any of these situations .

We just kind of wanted to let people know what's going on and give them that path forward , depending on which situation they find themselves in . Yeah , absolutely .

and type in Grow , your Painting Business , you can join the conversation . If you have any basic questions about the ERC , love to hear them , or ideas for a future podcast . And with that , we'll see you next week .