The government has been handing out a lot of cash lately–child tax credits, student loan forgiveness, and now, some are getting calls from financial companies saying the government will give them $26,000 per employee to help retain staff through the Employee Retention Credit (ERC).

Is this a real federal program doling out money to help businesses? Or are these calls just scams that are too good to be true? Actually, it could be both! Let’s dive into the details of the Employee Retention Credit to see what is actually being offered.

The Employee Retention Credit is a small business tax refund from the IRS, based on W-2 payroll and wages paid during 2020 and 2021. It’s not a grant and it’s not a loan, so there is no interest to pay.

  • There are no restrictions on the use of ERC tax refunds.
  • You have up to 3 years to claim the ERC Credit.
  • The ERC is based on eligibility per quarter, per employee, and calculating accurately.

Eligibility for a quarter is determined in two ways.

Eligibility Test #1: The business experienced a significant decline in gross receipts compared to 2019. This is the first and easiest test to run (Gross Receipts Test) to see if a quarter qualifies. Comparing each quarter of 2020 vs. 2019, and 2021 vs. 2019. If any quarter in 2020 had a 50% or more loss in revenue (2020 vs. 2019), it qualifies. If any quarter in 2021 had a 20% or more loss in revenue (2021 vs. 2019), it qualifies.

Eligibility Test #2: A full or partial suspension of the employer’s business operations by a governmental order. “Partial suspension” rules are complex and have multiple scenarios a business needs to meet to qualify a quarter in this manner. Run this test for quarters that are not eligible based on Test #1.

The majority of business owners, partners, and principals, plus family members related to these individuals, are not allowed to have owner’s wages calculated in the ERC, even though they might be on the payroll. This applies in most cases. There is a little more to these requirements, but this is a general outline of how to determine eligibility.

So is this a real federal program? Yes. But here’s why I believe the companies that are promoting this program through telemarketers are NOT looking out for your best interests.

First, these companies will help you file for your ERC, but their fees may be as high as 20-30% of your tax credit refund. The high cost of their service is how they can be so relentless in their advertising.

While this marketing tactic is an acceptable practice for non-CPAs, this type of billing is unethical for licensed CPAs due to the inherent conflict of interest and against the IRS Governing Practice Regulations that state:

“A practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained.”

Working for a percentage of the payout encourages the preparer to be more aggressive or even fraudulent for a bigger payday.

Second, most of these companies were recently created specifically to help you claim your credit. Once they run out of opportunities, they will shut down and disappear. This means if they bend or break the rules to obtain the ERC or to get you a larger credit (and thus, more fees paid to them), they won’t be around to help you defend your claim if the IRS comes knocking, even if they sold you their “Audit Protection.” If the IRS finds your claim was fraudulent in any way, you may have to pay interest and penalties to the IRS.

Lastly, some of these telemarketing calls could be a scam using the ERC program to acquire confidential information on your company and employees. NEVER send over sensitive information without a solid understanding of whom you are working with and a detailed contract.

Be wary of these phone calls and always ask questions to determine if the company is legitimate. By understanding the two eligibility tests for the ERC, you can determine for yourself if it’s worth pursuing.

If you decide you are eligible for the ERC but want help filing your claim, please reach out to us here at Root Tax to schedule a time to discuss the specifics. We make sure to keep our rates reasonable so that most of the credit goes back into your pocket.