What If I Claim ERC for Too Many Employees and Using Wrong Calculations?

Key Takeaways

• The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to keep employees on payroll during the COVID-19 pandemic.

• Claiming ERC for too many employees or using wrong calculations can lead to audits, penalties, and the need to repay the credit.

• There are specific guidelines for determining the number of employees that count towards ERC eligibility.

• If a mistake is made, it’s important to correct the claim promptly to minimize potential penalties and interest.

• Trusted professionals, like those at ERTC Express, can assist in ensuring compliance and maximizing legitimate claims.

Understanding ERC Eligibility

When we talk about the Employee Retention Credit (ERC), we’re referring to a significant provision from the U.S. government designed to help businesses keep their workforce intact during the tough times brought on by the COVID-19 pandemic. Initially, this credit applied to wages paid after March 12, 2020, and before January 1, 2021, but subsequent legislation extended and modified the ERC. It’s essential for businesses to understand whether they qualify for this credit and, if so, how to accurately calculate it.

The Employee Retention Credit (ERC) is a refundable tax credit that eligible employers can claim on qualified wages, including certain health insurance costs paid to employees. 

Does a Company with Too Many Employees Qualify for ERC Eligibility?

One common question is whether there’s a cap on the number of employees a business can have to be eligible for the ERC. The answer depends on the year and quarter in question. Initially, for 2020, businesses with 100 or fewer full-time employees could claim the credit for wages paid to all employees. For 2021, this threshold increased to 500 employees. However, businesses above these thresholds are not necessarily excluded; they simply must follow a different set of rules for which wages are eligible.

• For 2020, if you had more than 100 full-time employees, only wages paid to employees for the time they were not providing services could be claimed.

• For 2021, the threshold increased to 500 full-time employees, and the same rule applies—only wages for the time not worked are eligible.

ERC Eligibility Checklist for Incorrect Calculations

When determining eligibility for the ERC, especially if you’re concerned about having too many employees, it’s critical to conduct a thorough review of your workforce and apply the guidelines correctly. Here’s a quick checklist:

• Count your full-time employees based on the IRS definition—those working an average of 30 hours per week or 130 hours per month in 2019.

• Review the relevant quarter and year for the specific employee threshold that applies to your business.

• Determine if your business falls under the ‘large employer’ category for ERC, which affects which wages are eligible.

• Ensure that part-time employees are not included in the full-time employee count but consider their wages if they meet other eligibility criteria.

• Remember that for larger businesses, only wages paid for time not worked due to COVID-19 disruptions are eligible.

After understanding the basic eligibility requirements, we must delve into the consequences of claiming ERC with too many employees or using incorrect calculations.

Consequences of Incorrect Calculations

Let’s talk about what happens if you claim ERC for too many employees or if your calculations are off. First off, you risk an IRS audit, which can be time-consuming and stressful. If the IRS finds errors, you may have to repay the credit with interest and possibly face penalties. This is why it’s so important to get your claim right the first time around.

Most importantly, businesses must recognize that the ERC is not a one-size-fits-all credit, and there are nuances in the eligibility criteria. For example, if you have too many employees, you may be considered a large employer, which changes the rules about which wages are eligible for the credit. It’s not just about the number of employees but also about how much you paid them and whether they were working during that time.

Steps to Correct Incorrect Calculations

If you realize you’ve claimed ERC with too many employees or made errors in your calculations, don’t panic. There are steps you can take to correct your claim.

Step-by-step Guide: How to Correct Incorrect Calculations: 

Step #1: REVIEW YOUR ERC CLAIMS

Go over your previously filed claims to identify where you may have included too many employees or made calculation errors.

Step #2: CONSULT THE LATEST IRS GUIDELINES

Make sure you understand the current rules for ERC, as these have changed over time. This will help you correct your claim based on the most up-to-date information.

Step #3: ADJUST YOUR PAYROLL TAX FILINGS

If you find errors, you’ll need to adjust your payroll tax filings. This typically involves filing amended federal tax returns, such as Form 941-X for each quarter in which you claimed the credit in error.

Step #4: SEEK PROFESSIONAL HELP

It’s often wise to get assistance from a tax professional who is well-versed in ERC rules to help you navigate the correction process.

If you’ve received a notice from the IRS or are under audit, respond promptly and provide the necessary documentation to support your case or demonstrate your intent to correct the claim.

By following these steps, you can minimize the negative impact of claiming ERC incorrectly. Remember, honesty and prompt action are key when dealing with the IRS.

Prevent Future ERC Errors with ERTC Express

Going forward, you’ll want to avoid any further ERC claim issues. This is where services like ERTC Express can be invaluable. We specialize in helping businesses claim the ERC accurately and maximize their eligible credits while ensuring compliance with IRS regulations.

Here’s why you can trust ERTC Express:

• IRS Compliance: ERTC Express stays current on all IRS guidelines related to the ERC, so you can trust that your claims will meet all legal requirements.

• Trusted by the AICPA: As a service trusted by the American Institute of CPAs, ERTC Express has a reputation for reliable and professional tax services.

• U.S.-Based CPAs: With a team of U.S.-based CPAs, ERTC Express offers expertise in domestic tax law and payroll requirements.

• Power of Three – Audit Defense: ERTC Express provides a triple-layered defense strategy to protect against audits and ensure accurate claim submissions.

• Refund Maximization: Their team works to maximize your eligible refund, ensuring you receive every dollar you’re entitled to under the ERC program.

By partnering with ERTC Express, you can have peace of mind knowing that your ERC claims are in good hands.

Frequently Asked Questions (FAQ)

Can I still claim ERC if my business started mid-year?

Yes, you can claim ERC even if your business started mid-year, as long as you meet the other eligibility criteria, such as experiencing a significant decline in gross receipts or being subject to a government order that fully or partially suspended your operations.

What are the exact steps to rectify an ERC claim?

To rectify an ERC claim, you should first identify any errors in your original submission, consult the latest IRS guidelines, file amended returns with corrected information, and seek professional advice if needed. Prompt communication with the IRS is also crucial if you’re contacted about your claim.

How does ERTC Express protect against claim inaccuracies?

ERTC Express employs a team of experts who are up-to-date on all IRS regulations and guidelines. They conduct thorough reviews of your payroll and business operations to ensure that your claim is accurate and maximizes your eligible credit.

What records do I need to keep for future ERC audits?

For future ERC audits, you should keep detailed payroll records, documentation showing the number of full-time employees, proof of any government orders affecting your business, and records of any declines in gross receipts.

How do I determine if my business is a large employer for ERC purposes?

To determine if your business is a large employer for ERC purposes, count the number of full-time employees you had in 2019. If you had more than 100 full-time employees for 2020 or more than 500 for 2021, you’re considered a large employer for the respective periods.