The Employee Retention Credit (ERC) can be a game-changing source of funding for eligible businesses, but filing for it is not as simple as filling out a form and waiting for a refund. Many employers make costly mistakes that delay payments, reduce their credit amount, or trigger IRS scrutiny. By understanding these pitfalls, you can ensure your claim is accurate, compliant, and maximized.
Misunderstanding Eligibility Rules
One of the biggest mistakes with the ERC is assuming you don’t qualify without carefully reviewing the rules. Some businesses wrongly believe they are ineligible because they stayed open during the pandemic or received a PPP loan. In reality:
- You may still qualify if you experienced a partial suspension of operations.
- PPP loan recipients can also claim the ERC, as long as the same wages are not used for both benefits.
Failing to review the eligibility criteria thoroughly can mean missing out on substantial funds.
Incorrectly Calculating Qualified Wages
The value of the Employee Retention Credit depends on accurate wage calculations. Errors often occur when employers:
- Forget to include certain health plan costs.
- Misclassify employees as ineligible.
- Use the wrong time periods for wage calculations.
Even small miscalculations can significantly reduce your refund or lead to repayment demands if the IRS finds discrepancies.
Overlapping Claims With PPP Forgiveness
The Employee Retention Credit and PPP forgiveness cannot be applied to the same wages. Some businesses make the mistake of using the same payroll costs for both programs, which can result in the IRS disallowing part of the ERC claim. Careful coordination is necessary to ensure compliance.
Failing to Keep Proper Documentation
Without adequate documentation, your Employee Retention Credit claim could be challenged. Always maintain:
- Payroll reports and employee records.
- Proof of revenue decline or government-mandated operational changes.
- Copies of filed forms and correspondence with the IRS.
Good recordkeeping not only protects your claim but also speeds up processing if the IRS requests additional information.
Waiting Too Long to File
The ERC can be claimed retroactively, but the deadlines are firm. Businesses have up to three years from the original filing date of their payroll tax returns to amend them. Missing this window means losing the credit entirely. Delaying your claim also risks running into IRS processing backlogs, extending your wait for a refund.
Relying on Outdated Guidance
The rules for the Employee Retention Credit have evolved since its introduction. Some businesses rely on old information and miss opportunities to maximize their claims. Working with a professional who stays up-to-date with current IRS guidelines ensures your claim is accurate and reflects the latest changes.
Using Unverified Third-Party Services
While many reputable firms help businesses file for the Employee Retention Credit, some opportunistic providers overpromise and underdeliver. Avoid services that:
- Guarantee maximum refunds without reviewing your specific circumstances.
- Charge excessive fees.
- Fail to provide proper documentation for your claim.
Partnering with a trusted tax professional reduces the risk of costly errors.
Ignoring the Impact on Income Taxes
Although the Employee Retention Credit itself is not taxable, wages used to calculate the credit must be excluded from your business expense deductions. Some businesses overlook this adjustment, leading to unexpected tax issues during filing season.
Conclusion
Filing for the Employee Retention Credit offers tremendous financial benefits, but mistakes can reduce or even eliminate your refund. By understanding eligibility, calculating wages correctly, keeping thorough records, and working with knowledgeable professionals, you can avoid common pitfalls and secure the maximum ERC available to your business. Time is running out, so take action now to file accurately and before the deadline passes.
