Updates & Deadlines on Employee Retention Credit and “SETC”

Latest Updates on the Employee Retention Credit (ERC) and “Self-Employment Tax Credit (SETC)”

Employee Retention Credit Overview

The Employee Retention Credit (ERC) has been a vital support mechanism for businesses navigating the economic turbulence caused by the COVID-19 pandemic. However, the complexity of the program, evolving guidelines, and concerns about improper claims have prompted the IRS to implement additional compliance measures and introduce critical updates. This article breaks down the most recent changes, deadlines, and steps businesses can take to stay compliant while maximizing their benefits.

Key Employee Retention Credit Deadlines and Recent IRS Updates

• • ERC Second Voluntary Disclosure Program (VDP): Deadline November 22, 2024
    • Businesses that suspect their ERC claims were improperly filed have until November 22, 2024, to participate in the Second VDP. This program allows repayment of improper credits (minus 15%) without penalties or criminal liability.

• • Supplemental Claims for Previously Filed ERC Claims: UPDATED Deadline December 31, 2024
    • TPPs that filed ERC claims before January 31, 2024, can now correct and consolidate these claims through a supplemental process.
      • TPPs and Aggregated Filings: Organizations that filed ERC claims for multiple businesses under a single EIN must file consolidated supplemental claims to address errors or omissions. The original deadline to file these supplemental claims was November 22, 2024. As of November 21, 2024, the new deadline is December 31, 2024.
      • Employers and Individual Filings: If claims were filed using the employer’s EIN rather than a consolidated claim through a TPP, corrections or withdrawals must be handled individually for each affected return.

• • Final Deadline for 2021 ERC Claims: April 15, 2025
    • Eligible businesses can still file claims for the 2021 ERC until April 15, 2025.

IRS Progress on Pending Employee Retention Credit Claims

The IRS continues to make headway in processing the enormous backlog of ERC claims:

• • 400,000 Claims in Progress
    • As of now, 400,000 claims totaling $10 billion in credits are being processed. Low-risk claims are prioritized for payment.

• • Heightened Scrutiny of High-Risk Claims
    • In 2024 alone, 28,000 disallowance letters have been sent, preventing $5 billion in improper payments. Additionally, 460 criminal investigations have been initiated, with severe penalties for fraudulent claims.

• • Moratorium Revisions
    • The IRS lifted its moratorium on ERC claims filed after September 14, 2023, through January 31, 2024, allowing submissions within that timeframe to be processed. Some claims submitted as late as January 2024 have already been processed and funded.

Warning Signs of Improper Employee Retention Credit Claims

The IRS has identified 12 red flags that indicate potential errors in ERC filings. Five most recently added signs include:

1. Essential Businesses Claiming Full Suspension: Businesses that operated fully during the pandemic may not qualify unless operations were directly impacted by a government order.
2. Insufficient Documentation of Suspension: Claims must clearly demonstrate how government orders suspended business operations, supported by specific documentation.
3. Family Wages: Wages paid to related individuals, such as owners’ family members, are ineligible for ERC claims.
4. Overlap with PPP Forgiveness: Wages used for PPP loan forgiveness cannot also be claimed for the ERC.
5. Large Employers Misclaiming Wages: Large businesses (500+ employees in 2021) can only claim ERC for wages paid to employees who were not working.

Options for Resolving Questionable Employee Retention Credit Claims

For businesses or TPPs managing questionable claims, the IRS offers several remedies:

• • Claim Withdrawal: This process allows businesses or TPPs to withdraw unprocessed ERC claims entirely, avoiding penalties and interest. Claims are treated as though they were never filed.
  • Amend Returns: Incorrect claims can be corrected by filing amended returns.
  • Voluntary Disclosure Program: Improper credits can be repaid (minus 15%) under this program, offering a chance to resolve errors without additional liabilities.

What Should Employers and TPPs Do Next?

• • Review Claims for Compliance: Employers should confirm eligibility for each quarter, ensuring that documentation supports the claim. TPPs should assist clients in identifying potential errors in aggregated filings.
  • Act Promptly on Supplemental Claims or Withdrawals: If errors are identified, TPPs can submit a supplemental claim or withdraw problematic claims before the December 31, 2024, deadline.
    • Non-TPP-filed claims still only have until November 22, 2024, to take advantage of the ERC-VDP program.
    • The Claim Withdrawal Program remains available for non-TPP filers, with no current deadline other than the processing of your claim.
  • Consult Trusted Professionals: Avoid promoters offering “easy money” from ERC claims. Work with qualified tax professionals familiar with ERC rules to navigate adjustments, appeals, and compliance concerns.

Understanding Third-Party Payers (TPPs) and Their Role in Payroll Tax Compliance

In the context of payroll tax compliance, the IRS uses the term Third-Party Payer (TPP) to describe entities responsible for managing payroll taxes on behalf of employers. This designation applies to organizations that handle payroll tax reporting and payments, sometimes across multiple businesses, under specific operational structures. Examples include:

1. Professional Employer Organizations (PEOs): These entities often manage payroll, employment taxes, and HR functions for multiple businesses, filing under their own Employer Identification Number (EIN).
2. Certified Professional Employer Organizations (CPEOs): Similar to PEOs, these organizations are certified by the IRS and assume joint liability for employment tax compliance.
3. IRC Section 3504 Agents: These are agents specifically authorized under the tax code to manage employment taxes on behalf of employers.

Do TPPs Include All Payroll Preparers?

Not necessarily. The distinction hinges on how payroll taxes are managed and filed:

• • Organizations That Aggregate Payroll Taxes: Entities such as PEOs, CPEOs, and certain payroll service providers aggregate payrolls from multiple clients and file taxes under their own EIN. These are clear examples of TPPs.
  • Individualized Preparers or Advisors: If a payroll provider, such as an accounting firm, prepares and files payroll tax returns using the employer’s EIN (rather than aggregating under its own), the provider is not classified as a TPP in the IRS’s definition. Instead, they function as a preparer or advisor to the business.

This distinction is important when navigating programs like the Supplemental Claim Process or the Voluntary Disclosure Program (VDP) for the ERC. The responsibilities and procedures for adjusting or withdrawing claims differ based on whether payroll taxes were aggregated under the TPP’s EIN or filed directly under the employer’s EIN.

“SETC” Clarification and Deadlines

The “Self-Employment Tax Credit” (SETC) is a colloquial term referring to the tax credits available to self-employed individuals under the Families First Coronavirus Response Act (FFCRA) and the American Rescue Plan Act (ARP). These credits were designed to provide financial relief to self-employed individuals who were unable to work due to COVID-19-related circumstances.

Understanding the Credits

The FFCRA and ARP introduced refundable tax credits for self-employed individuals who, due to COVID-19, were unable to perform services in their trade or business. These credits are calculated based on the number of days the individual was unable to work and their average daily self-employment income.

Eligibility Criteria

To qualify, self-employed individuals must have been unable to work for reasons such as:

• • Being subject to a quarantine or isolation order related to COVID-19.
  • Advised by a health care provider to self-quarantine due to COVID-19 concerns.
  • Experiencing COVID-19 symptoms and seeking a medical diagnosis.
  • Caring for an individual subject to a quarantine order or advised to self-quarantine.
  • Caring for a child whose school or place of care was closed due to COVID-19.

Claiming the Credits

Eligible individuals can claim these credits by filing Form 7202, “Credits for Sick Leave and Family Leave for Certain Self-Employed Individuals,” with their tax return. This form calculates the qualified sick and family leave equivalent amounts.

Important Deadlines

For leave taken between April 1, 2020, and December 31, 2020, the deadline to claim the credit was April 15, 2024.

For leave taken between January 1, 2021, and September 30, 2021, the deadline is April 15, 2025. If no days were claimed on the 2020 return, the total potential amount that could be claimed by eligible self-employed individuals on the 2021 return might be as much as $27,110. It’s crucial to file an amended 2021 tax return by the deadline to claim the credit.

Caution Against Misleading Claims

The IRS has warned against misleading claims about a non-existent “Self-Employment Tax Credit.” Promoters and social media have inaccurately suggested that many more people qualify for this credit than actually do and can receive substantial payments. In reality, the credits are limited to specific COVID-19-related circumstances in 2020 and 2021. Taxpayers are advised to consult with a trusted tax professional to determine eligibility.

For detailed information, refer to the IRS guidance on tax credits for paid leave under the FFCRA and ARP.

Final Thoughts on Employee Retention and Self-Employment Retention

Navigating the evolving ERC landscape and understanding the details of programs such as the “SETC” requires vigilance, proper documentation, and an understanding of key deadlines and roles. Employers, TPPs, and paid tax preparers must act responsibly to avoid improper claims while ensuring eligible businesses and self-employed individuals receive the benefits they deserve.

If you have questions about these updates or need assistance managing ERC and “SETC” claims, consult a trusted tax professional to guide you through the process with confidence.