Employee Retention Tax Credit
The Employee Retention Tax Credit (ERC) is a refundable tax credit of up to $26,000 per employee for certain eligible businesses and tax-exempt organizations that paid qualified wages to some or all employees after March 12, 2020, and before January 1, 2022. Generally, an employer is eligible for the ERC if it was:
- Suspended by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021, or
- Experienced the required decline in gross receipts during 2020 or the first three calendar quarters of 2021, or
- Qualified as a recovery startup business for the third or fourth quarters of 2021.
Under current rules, state-chartered credit unions can claim the ERC for eligible expenses paid in 2020 and 2021, but federally chartered credit unions cannot claim the credit for 2020. This is because, as America’s Credit Unions pointed out in their January 18, 2024 comment letter to House Ways and Means Committee and Senate Finance Committee, “an oversight in the CARES Act [that] unintentionally prohibited federally chartered credit unions from successfully applying for the Employee Retention Tax Credit (ERC) for tax year 2020.” This made federally chartered credit unions one of the only ineligible private sector businesses.
Federal credit unions are not-for-profit cooperatives under Section 501(c)(1) of the Internal Revenue Code and are classified as “federal instrumentalities” in the CARES Act. The congressional intent to the ERC was to block quasi-governmental entities from accessing this payroll credit, not federally chartered credit unions.
On September 14, 2023, the IRS announced it would stop processing ERC claims due to an abundance of improper and fraudulent ERC claims. The IRS also announced that it would not process new ERC claims until at least January 2, 2024. In addition, it stated that it would still process claims received prior to September 14, 2023. Following a further detailed review of ERC claims, the IRS announced in June 2024 plans to deny tens of thousands of improper high-risk ERC claims while starting a new round of processing lower risk claims to help eligible taxpayers.
The IRS announced on August 8, 2024, that it would begin processing some high- and low-risk ERC claims filed during the moratorium. Taxpayers who filed claims between September 14, 2023, and January 31, 2024, may receive payments (or denials) for some quarters while the IRS continues to review other quarters for eligibility, as eligibility can vary from quarter to quarter based on a variety of factors.
The IRS has a question-and-answer tool to see if you might be eligible for the ERC. Resolving an incorrect claim may help avoid having to repay an incorrect credit, possibly with penalties and interest. The IRS continues to urge those with unprocessed claims to consider the special IRS ERC Withdrawal Program to avoid future compliance issues.
Employers that submitted an ineligible claim have options to avoid future issues such as audits, repayment, penalties, and interest.
- Withdraw an ERC claim if your ERC has not been paid yet, or if you already received a check for ERC but have not cashed or deposited it.
- Apply for the second Employee Retention Credit Voluntary Disclosure Program if you received an incorrect ERC and want to pay it back.
Please note that this summary does not constitute tax or legal advice. As each credit union is unique in its structure and circumstances, America’s Credit Unions urges you to consult a tax professional.