What Is the Employee Retention Credit for 2024?

The Employee Retention Credit (ERC) is a significant topic for businesses and the IRS alike. Recently, there have been important developments that highlighted the Internal Revenue Service’s (IRS) prioritized goal of cracking down on improper ERC claims. These changes affect many businesses and how they handle their taxes.

This article explains what the ERC is, some recent progress made by the IRS, and what companies need to know moving forward.

What is the Employee Retention Tax Credit?

The Employee Retention Credit is a refundable tax credit for businesses. Congress created it to help businesses keep employees on their payroll during tough times, like the COVID-19 pandemic. When a business qualifies, it can receive a credit against the employer portion of payroll taxes based on a percentage of qualified wages that the business paid to employees.

For 2024, the ERC rules are clear but have become strict. To qualify, businesses need to demonstrate significant pandemic-related impacts, such as a substantial drop in gross receipts or complete or partial shutdowns due to government orders. After meeting these criteria, they can apply for the ERC and reduce their tax bills, helping them save money and keep their workers employed.

IRS Moratorium Without a Set End Date

One major change for 2024 is that the IRS has not set an end date for the moratorium on new ERC claims issued in September 2023. This means businesses cannot submit new claims for credit at this time. The IRS paused on accepting new applications to review and audit existing ones more thoroughly.

The pause in accepting credit claims helps the IRS focus on finding and stopping improper ones. Businesses that were planning to apply for the ERC now must wait until the IRS lifts the moratorium. The deadlines to file ERC claims are April 15, 2024, for the 2020 tax year and April 15, 2025, for the 2021 tax year. But based on the the current Act, they cannot submit any new ERC claims after January 31, 2024. Such a change highlights how important it is for companies to ensure their claims are accurate and legitimate.

Withdrawing Claims

In October 2023, the IRS introduced a new withdrawal process for employers. The process applies for businesses that filed an ERC claim but have not yet received a refund, allowing them to withdraw their submission and avoid all associated civil penalties.

Though the withdrawal program is currently active, the IRS has suggested it may end soon. There is speculation that the program will conclude around the same time the moratorium on processing new claims is lifted.

IRS Program for Voluntary Disclosure

The IRS has a new voluntary disclosure program (VDP) for employers who made mistakes with Employee Retention Credit (ERC) claims. Through this program, employers sign an agreement to return 80% of the refund amount. They keep the remaining 20% without facing any civil penalties or interest related to the claim. Employers also need to disclose any consultants, promoters, or preparers who helped with the claim.

This initiative aims to promote compliance and fairness while offering a path for employers to proactively resolve issues with their ERC claims.

Company Actions Moving Forward

What should companies do next?

• Evaluate Claims Thoroughly: Ensure all claims follow IRS guidelines. Improperly claiming ERC may require repayment, which leads to extra taxes and penalties for mistakes. There is a risk of criminal charges as well. Expect a likely audit when the ERC was claimed through a promoter under investigation.

• Proceed with Caution: Eligible businesses considering filing ERC claims need to be cautious. Double-check the business’ eligibility. Ensure all documentation is accurate and complete.

• Consider Self-Disclosure: When there is any uncertainty about the validity of claims or a fear of miscalculation, participating in the IRS's upcoming self-disclosure program can help avoid penalties. Act quickly before the program expires.

• Utilize the Withdrawal Program: A business that has submitted a claim but has not received payment and has concerns about its accuracy needs to consider withdrawing the claim through the IRS's withdrawal program.

• Expect Delays: Be prepared for increased processing times. The IRS has stated that its standard processing goal for existing ERC claims will extend from 90 days to 180 days. Processing times can become even longer. This happens when the claim requires further review or audit.

Dealing with the complexities of the Employee Retention Credit demands careful attention to IRS rules. Understanding these steps will be crucial for businesses looking to use the ERC while avoiding issues with improper claims.

Navigating ERC Compliance and Benefits

The Employee Retention Credit is a valuable tool for businesses that comes with strict rules and requirements. Recent progress in compliance efforts made by the IRS show that there is a strong focus on ensuring that only eligible businesses benefit from the ERC. Companies must be careful, honest, and proactive in managing their ERC claims.

By understanding the ERC, following the latest rules, and taking advantage of programs, businesses can navigate these changes successfully, helping them stay compliant. Most importantly, it ensures that they can continue to support their employees during challenging times.