Pay Higher Taxes if You Get ERC (Employee Retention Credit)
Many most business owners that got the ERC, Employee Retention Credit, from the IRS do not know that getting the ERC may result in a high tax liability with the IRS. In this video we explain why when you get the ERC credit from the IRS you need to amend your business tax return and most likely have to pay higher taxes.
This video is intended for education purposes and should not be taken as legal, financial or tax advice. You should consult with a professional about your unique situation before acting on anything discussed in these videos. Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. are providing educational content to help small business owners and individuals become more aware of certain issues and topics, but it cannot give blanket advice to a broad audience. Neither Freedomtax Accounting and Multiservices Inc., Freedom Insurance Financial Inc., Freedom Realty Source Inc., and Freedom Immigration International Inc. nor its members can be held liable for any use or misuse of this content.
Hello from Freedom Group. In this video, we’re going to talk about if you got the ERC credit from the IRS, and why you’re going to have to pay more taxes. To help me with this topic, I’m going to bring in my coworker, Carmen. Carmen, how are you?
I’m doing great again. How are you?
Good. Carmen is our ERC expert. She has been doing ERC work now for three years. Carmen.
Since the credit came out, yeah, back starting in 2020. Second quarter 2020.
This is interesting because a lot of people think this ERC credit is new, but it’s actually not. It’s been around for three years now.
Yes. There are two different points of view. People think that it’s new and it isn’t, and people think it’s too late to get it, and it’s not. So we’re right in the middle.
Perfect. Carmen, a lot of people, unfortunately, are getting scammed when getting these ERC. A lot of companies are offering this ERC service, and they are not advising these business owners well, and they’re not advising and they’re not telling them the consequences of getting these ERC credits, especially since if you get the credit, you may have a big tax bill coming up. Basically, I heard that this credit isn’t considered income. Why can that lead to paying more taxes?
Okay, great question. You’re right. The credit is not considered income, and that’s not how you would code it in the accounting when the money is received. It’s a reimbursement, basically. It’s not coming in as income, so your gross income for the year is not going to change. However, the deduction that you took that year for your salaries and wages, that’s going to go down, just like any other thing you get reimbursed for. Say an office or a business bought a computer and it costs a thousand dollars and they bought it in September. Well, in their financials, it’s going to show a $1,000 deduction in office expenses. But then in two weeks, they go back and return it. Then it’s going to come back as a deposit. It’s going to cancel out and it’s going to be zero. When you look at the profit and loss, it’s going to say zero expense because it didn’t happen if you got reimbursed. That’s what happens with the credit. Whenever you get it, you have to amend your taxes, which is something that people are not clear on. It’s going to reduce the wages or the expenses, the deduction that was taken for salaries and wages by however much you got on the credit.
So if you reduce the deduction, that means there’s more left over for profit or less of a loss. So that’s definitely going to mean potentially that you’re going to have to pay more taxes.
Wow. So when do you reduce the salaries and wages? Do you reduce it when you get the money?
No, that’s another great question. Look at where we are. We’re in 2023, and a lot of people are amending their returns to getting their credits this year, maybe even next year. However, the law states, the IRS notice 2021, Fash 49, specifically on page 24, if you want to be technical, that you are going to have to amend the year and reduce the deduction the year the wages were originally paid. So if you’re using 2020 wages to calculate the credit and you receive the credit, then that year when those wages were paid, that’s the year you must amend to reduce the deduction. You don’t amend it in 23 or in 24 or whenever you got the credit, you amend the year where those wages originated.
Wow. Basically, if somebody uses or gets the ERC credit for wages claimed for 2020, they need to go back and amend their 2020 business tax return.
If it’s an S-corp, they need to amend their business tax return and their personal tax return.
That’s right. Not only 2020, because if you amend 2020 and your net profit changes, then that’s going to change your starting numbers for the following year. It’s a little bit of a domino effect. Say you only got it in 2020, you have to amount in 2021 and ’22 if you haven’t done those yet, which I hope you have because we’re a week away from the extension deadline. Yes, it is a ripple effect, and therefore all those K-1s are going to change. That’s something that you also have to keep in mind when you look into this credit and you focus on how much you’re getting back, well, how much are you going to have to change and pay for to amend, and how much is that going to make you owe more in taxes? These are all things you have to consider before saying, You know what? I’m going to apply for this credit and it’s worth it.
Obviously, they need to change in the accounting of their salaries and wages, which is what they’re claiming for the credit. What’s included in salaries and wages?
Okay, so salaries and wages make reference to wages that are paid that are subject to FISA tax, okay? Okay. Put it in layman’s terms. If you’re paying a worker and you are deducting Social Security and Medicare from them, they get a W-2 at the end of the year. That’s what’s considered salaries and wages. Of course, we leave the subcontractors out of it, right? Which brings… Just this week, I have to add this as caution to everybody, one of these aggressive companies, we had a gentleman call to get more information about the credit. He wanted to confirm that he couldn’t qualify because he only paid 10.99 subcontractors, right? I confirmed. I said, Yes, indeed, you don’t qualify because you did not have payroll in 2020 or ’21. The person was saying, Okay, fine. I had that feeling, but the company was telling me they kept emailing me, harassing him. They kept following up, following up, following up because they wanted to make the sale. They were telling him that they could turn those 1099s for 2020 or 2021 into payroll. Instead of having those 1099s, they would cancel the 1099s, go back, and do retroactive late payroll.
Oh, my God. Oh, my God. What a mess. Everybody who received the 1089, says he had 10 people, not only is he going to have to amend his taxes to account for the credit? But everybody who gets a 1089, who originally got a 10.99, but now they want to give them a W-2, they would have to amend all their taxes. Not only that, this credit and this whole idea was issued, the spirit of the law was to help people with what happened back then if a business had employees and they retained them. How are you going to go back and file payroll late? The IRS is going to receive it all this year. If they’re not going to notice that, if you get audited, they will absolutely disallow that. Yeah, it sounds good on paper and mathematically works, but that’s a disaster. Don’t even touch that with a 10-foot pole.
Wow. Okay. We now know that if you get the credit, you need to go back and amend the tax returns of the year that you’re claiming the credit. So do I need to wait till I get the money to make the amendment? Or when do we amend those tax returns?
You don’t have to wait. Probably the IRS wants you to do it right away, right? Because you can amend them as soon as you know the amount. If you’re going to somebody who is reputable and you’re confident in the amount that you’re going to get, that’s the true amount, then you can go ahead and amend them right then and there. However, maybe just to play it a little bit so that it’s a little bit more comfortable because, again, you’re going to amend the taxes and you potentially could have a tax liability at the end of that amendment. You may not have the money to pay for that. Maybe you’re counting on the ERTC to come in to pay for it. Maybe don’t do it right away, but do it maybe three months out. Just don’t forget to do it. My fear and my caution, I want to caution everybody, is that they get the money, they get all excited, and then they forget to go back and amend them. That’s going to come back and blow up. Just don’t forget, try to do it as soon as possible. As soon as you know the amount, you can amend it.
Okay. Basically, Carmen, I am a business owner and I decide to apply for the ERC and I see that I am eligible to get a credit for 2020 and I also qualify for an ERC credit for 2021. I do decide to move forward and I know, okay, based on the accounting, I’m going to get $80,000 of ERC credit. Now that I know that, I know that I need to go back and amend my 2020 business tax return, and my 2021 business tax return. If I’m an escort, I need to amend my 2020 personal tax return.
My 2021 tax return. Since I’m claiming the credit, my net profit for those years is higher, and now I’m going to owe taxes for 2020 and 2021. Is all that worth it to get the ERC credit?
That’s the million-dollar question, right? That is one thing that at least we hear. We do this service in phases because it may not be. You may just break even. Why go through all this hassle just to end up with $1,000 extra or something? I don’t know. Whatever amount would make it not worth it for you. But you have to take into account how much you’re getting back, how much they’re charging you for the service. I’ve heard some of these places are charging crazy amounts. But anyway, the amount of the service, the amendments that you have to do on all these tax returns, maybe you’re not the only owner. Maybe it’s an S-corp and you have five members and five owners, so they’re all going to have to amend. You have to think about all these things, think about how much more taxes you’re going to have to pay, and then compare that to the credit. Oftentimes it’s absolutely worth it. There are cases where people are getting back 150,000 and it’s going to take up between fees and taxes, 50. They’re still ending up with 100. Absolutely, that’s worth it. But in some other cases, it’s not.
One thing I wanted to add, is don’t get scared by the fact that your profit is going to go up. Remember, it’s not always going to make you pay taxes. I had a case where the person had a big loss and he couldn’t take the whole loss anyway due to his basic limitation. What all this did was make the loss less big, but it still didn’t affect him. He paid zero additional tax on his personal taxes because his basis was 20. Say he could only take $20,000 of a $80,000 loss and this credit made it so that the loss was $60,000. Well, he could only take 20 anyway, so it didn’t affect them. It’s not always going to make you pay taxes, but it’s a big potential.
Okay. Basically, the takeaway is every case is different.
Every case is different.
Then just know that if you’re getting pitched by one of these companies saying that you’re eligible for this credit, make sure that you’re working with a professional, because we hear a lot of stories of people that are not eligible, and now they’re getting this credit. Then the risk is the IRS is going to audit, the IRS is going to find out you weren’t eligible for this credit, and now you’re going to have to return the money with penalties and interest. But even if these companies tell you and you’re sure you are eligible for this credit, make sure that you know that now you need to go back and amend your business tax return. That may result in a tax liability. You need to know exactly, Okay, I’m getting this much credit, but now I need to know how much am I going to pay for the service, how much am I going to pay for making the amendments, how much is going to be my tax liability? Now you know, Okay, these are my costs for getting credit, and this is how much I’m really going to end up with and make a decision if it’s worth going through that process.
Yes. Part of that decision-making making, because some people, just don’t feel comfortable looking at their taxes themselves and making that decision on a personal level. If you have already an accountant that you trust, or even if you don’t, but that’s the person who did your tax returns, and you want to do this credit and you’re going to some other company to do it, please communicate with your original tax prepare or accountant and tell them what you’re doing. Don’t just go do it and then tell them, Oh, how is this going to affect me? Because then it’s too late. So communication is key. If you’re using different parties, go back to your accountant and tell them what you’re planning on doing and get that advice as well.
Okay? Okay, perfect. Right now, if someone is watching this video and they’re not sure if their ERC was done correctly or if they’re planning on getting it and they want to make sure to get it correctly, what should they do?
They can absolutely call us. The number is right on the screen, 407-344-1012. We can do an evaluation of your case. If you already got it. We can just reevaluate it and do the quote as if we were going to do it to see if the numbers match. If they don’t, then we would advise accordingly, depending on what that situation is. Because again, this is not a one-size-fits-all-all. This affects every business in a unique way.
Perfect. Now you know, getting the credit may result in a big tax liability. Just make sure it’s being done correctly and make sure that you don’t get in trouble with the IRS for claiming a credit that you weren’t supposed to get. Thank you for watching this video. If you have received value out of this information, like it and share it with another business owner. Carmen, thank you very much.
Always at your service. Always a pleasure.
Very good. God bless. Bye-bye.
God bless you. Bye-bye.
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