Common Misconceptions About the Employee Retention Credit

The initial confusion surrounding eligibility for the Employee Retention Credit (ERC) was compounded by subsequent legislative changes, resulting in a complex eligibility matrix for employers to navigate without clear guidance. Despite the lack of formal regulatory guidance from the IRS, taxpayers must understand the legislation’s details to determine eligibility and calculate the ERC accurately. As legislative updates continue to roll out, it is crucial to address the misconceptions that have arisen due to the complexities and ambiguities of the ERC.

Below are five common misconceptions about the Employee Retention Credit:

1. It is required to have experienced a decline in revenue to qualify for the ERC. Employers may be eligible for the credit even if they have not satisfied the gross receipts test.
2. It is necessary for an employer’s operations to have been completely shut down to qualify for the ERC. Employers who experience a partial suspension of operations due to a government order may still be eligible for the credit.
3. Employers who have received a Paycheck Protection Program (PPP) loan cannot take advantage of the ERC. The CARES Act initially prohibited PPP loan recipients from taking the ERC, but legislation retroactively allowed employees to claim both if eligible.
4. Tax-exempt organizations are considered ineligible employers for the ERC. Unlike most federal tax credits that are taken against income tax liability, tax-exempt organizations are explicitly acknowledged as eligible employers under the CARES Act.
5. The size of an employer’s business affects only the types of wages included in the ERC calculation as well as eligibility. Whether an employer is classified as small or large based on their average full-time headcount in 2019 only affects the type of wages that can be included in the ERC calculation, and not eligibility. While qualified wages for the ERC vary, certain types of wages cannot be included for any employer, such as those falling under the double dipping prohibition, wages paid to ineligible individuals, or wages not subject to FICA.

Given the complexity of the ERC, it is recommended to consult with professionals who have experience in this area to determine whether your business is eligible. Although the original provisions of the CARES Act ERC have changed, its intent has remained the same.