Top 7 Mistakes of Business Owners Filing the ERTC

August 30, 2023
Dayes Law Firm

The Employee Retention Tax Credit (ERTC or ERC) has helped businesses nationwide recover from the financial losses they faced during the COVID-19 pandemic. Despite its success, Congress’s modifications to the program have confused business owners.

There are several ERTC mistakes that employers make. What are they, and how can you avoid them?

What Is the ERTC?

The ERTC is a tax credit Congress introduced in 2020 as part of the CARES Act. Because so many businesses were losing money and shutting down, unemployment was on the rise. The Employee Retention Tax Credit incentivized businesses to keep employees on their payroll.

The ERTC offered a tax refund for 50% of employee wages up to $10,000 per employee in 2020. In 2021, this percentage rose to 70%. These funds helped business owners keep their heads above water while they recovered from the pandemic’s impact.

Seven Common ERTC Mistakes

Many business owners make these ERTC mistakes and could be losing money because of them. 

Misunderstanding the Qualification Tests

Many business owners mistakenly think they don’t qualify for the ERTC under the gross receipts test and full or partial suspension test. Note that you only need to qualify under one of these tests, not both. In 2021, the qualification for the decline in gross receipts dropped from 50% to 20%, allowing more businesses to file for the ERTC

A suspension of regular operations doesn’t have to be a complete suspension. If a government order forced your business to partially shut down or alter your regular operations in any way, you may qualify for the ERTC.

Believing Essential Businesses Don’t Qualify

Some businesses believe they don’t qualify for the ERTC because the government deemed them essential, so they didn’t shut down during COVID-19. 

Remember, any partial suspension may make you eligible for the ERTC. If COVID-19 impacted you through vendors or non-essential components of your business, you can still qualify. 

Thinking PPP Loans Disqualify Businesses

Although businesses originally could not qualify for the ERTC if they’d already claimed PPP, this is no longer the case. 

The Consolidated Appropriations Act made it possible for businesses to qualify for both forms of aid as long as the payroll used for your ERTC claims wasn’t paid using a PPP loan.

Believing Charities Cannot Qualify

Charities, non-profit hospitals, churches, museums, and similar institutions may still qualify for the ERTC. 

Misunderstanding How to Count Employees

Small businesses can use all employee wages to claim the ERTC. You had to have 100 or fewer employees in 2020 to qualify as a small business. This number rose to 500 in 2021. Some also forget only to include full-time workers in this employee count.

Thinking That Growth Disqualifies Businesses

While some businesses may have seen some growth, particularly in 2021, this doesn’t automatically disqualify them from the ERTC. A business could still qualify if it faced a partial or full suspension.

Not Keeping Proper Documentation

It’s essential to keep proper documentation while filing for the ERTC. You may face an IRS audit if you fail to provide the right documentation. Keep all records of your business’s gross decline, full-time employees, and qualified wages. 

Avoid ERTC Mistakes and Contact a Tax Attorney

Keeping track of all these rules and documentation requirements can add much to your full plate. Talking to a tax attorney will help ensure you avoid all the above ERTC mistakes and more. 

At Dayes Law Firm, we’ve assisted businesses in applying for $250 million in ERTC claims. Contact our ERTC team at (866) 567-4510 to schedule a free consultation.