The employee retention tax credit, or ERC, was introduced as part of the 2020 pandemic relief package. This refundable tax credit for employers was issued to encourage businesses to keep employees on payroll. This tax credit lasted from 2020 to 2021, but businesses can still apply.

While the ERC and PPP have helped out millions of Americans, there are many misconceptions that stop those who qualify from getting it. This article will dismantle these misunderstandings.

7 Common Misunderstandings About the ERC

While 2021 marked the end of the ERC tax credit, that doesn’t mean you can’t still benefit from it in 2023. Here are some common misunderstandings that may stop you from getting the ERC.

Myth 1: If your business is eligible for the second draw Paycheck Protection Program (“PPP”), you can’t also benefit from the ERC

Let’s get one thing straight: the complexity of PPP and ERC rules can be very confusing, and it’s often in your best interest to receive ERC tax credit help from a professional. However, we’ll do our best to explain how both programs work and if you can be eligible for both at once.

To start, you can’t use the same $1 of payroll utilized towards both ERC and PPP debt forgiveness, but it’s possible to have enough payroll left over to receive both. The CCA 2021 states that, during the Second Draw PPP covered period, payroll costs for PPP debt forgiveness don’t include qualified wages that were taken into account in determining your ERC amount.

Therefore, payroll used during the Second Draw PPP covered period could be used for ERC. 

However, there are some stipulations. For example, all PPP debt forgiveness must be incurred through payroll, but only 60% of the Second Draw PPP principal balance is required to be used toward payroll. Non-payroll expenses, which make up 40% of the Second Draw PPP principal balance, can include things like mortgage payments, operational costs, and damage costs.

Myth 2: You don’t qualify for the ERC because you don’t have a significant decline in gross receipts

To qualify for ERC, you need to prove that your operations were fully or partially suspended or that there was a significant decline in gross receipts. You don’t need to check off both boxes, only one, so you can still qualify if your operations were either fully or partially suspended.

Myth 3: To ensure that your company can qualify for ERC, you have to wait for your First Quarter to be completed

If you’re applying for ERC in Quarter 1 and your Quarter 4 receipts declined more than 20%, then you already qualify for ERC when the next year clocks over. You don’t have to wait until Quarter 2 to apply for ERC. This is especially true if you missed an ERC qualifying year.

Myth 4: Since your business was operating in some capacity, you can’t qualify as having a full or partial shutdown 

Many business owners mistakenly think that because their business was opened in some capacity, they don’t get to receive ERC. That isn’t the case. If your business hours were limited or your suppliers or other essential businesses were suspended, you qualify for ERC.

For example, if you ran a nightclub that used to close at 2 am, but pandemic curfew forced you to close at 9 pm, this would mean that your business hours were limited. If you’re a spa and you couldn’t offer certain services because your suppliers were short on towels, then your suppliers prevented you from operating regularly. Both businesses would have no problem getting ERC.

Myth 5: Your company has more than 500 employees, so it doesn’t qualify for ERC

The ERC doesn’t take the number of employees you have into account when assessing if you qualify, but there are some exceptions to that rule. If you have 500 or fewer employees, you can include any type of wage when determining the maximum amount allowed for qualified wages.

If you have over 500 employees, you can only evaluate wages paid to employees. That means that if you paid for your employee’s healthcare plan, you could include this amount for the ERC. 

Myth 6: Since PPP stated that I had over 500 employees, the ERC will say the same

It’s important to note that PPP and ERC calculate the number of employees you have differently. For ERC purposes, an employee is someone who averages 30 hours of work a week or 130 hours of work a month. PPP counts every employee, no matter how much they worked, as an “employee.” This means that you may have less than 500 employees in the eyes of ERC. 

Myth 7: You can only receive your ERC cash payment after you file your quarterly payroll Form 941

This is partially true. While yes, you won’t receive your cash payment until after you file your Form 941, it’s in your best interest to calculate how much you’ll reasonably receive from the ERC. That way, you can take out that cash now and use it for your payroll expenses.

If you choose to wait, you’ll be waiting a long time. It takes the IRS an average of 5 months to hand out this payment, and if you can’t wait that long, you might as well save that cash now. 

In Conclusion… 

Now that you know what could be holding you back from getting ERC, you can determine whether or not you missed out on getting this one-time payment. Fortunately, there’s still time. If you act fast enough, you can get ERC and use that funds to start repairing your business.