Employee Retention Credit: What Your CAA Needs to Know

Should you claim the credit?

Applicable Credits

While CAAs and state associations may be eligible for the Employee Retention Credit, the Credits they receive that relate to qualified employee wages originally charged to federal grants are likely to be considered “applicable credits” under the Uniform Guidance. 2 CFR § 200.406. Applicable credits refer to receipts or reduction-of-expenditure-type transactions that offset or reduce expense items allocable to the federal award. If considered applicable credits, this would require the payroll tax savings from the Employee Retention Credit to be credited back to the federal award as either a cost reduction or refund to the awarding agency.

For example, if a CAA is claiming the Credit for qualified wages paid to Head Start teachers whose salaries were 100% charged to the Head Start award, 100% of the Credits the employer receives for such Head Start employees would be credited back to Head Start under the applicable credits analysis.

If the CAA is claiming the Credit for qualified wages paid to an employee whose salary is paid for with a mix of funding sources, for example, 20% Head Start funding, 10% unrestricted, non-federal funds, and 70% state and private funding, the employer must take each funding source into account when deciding whether to claim the Credit. In this example, the employer: (1) must credit 20% of the Credits received for this employee back to Head Start under the applicable credits analysis, (2) may keep 10% of the Credits received, and (3) should check with each funding source on how to treat the Credit with respect to the remaining 70%, as there may be similar applicable credits rules that apply to state and private grants.

Federal funding sources may take different approaches as to the treatment of Employee Retention Credits subject to the applicable credit requirement. Some may require the grantee to repay the Credit as an offset to the salary costs originally charged to the grant, while others may allow the grantee to keep the Credit as an addition to their current-year program funding, or take another position. The total amount of the Credit subject to the applicable credits analysis may influence the approach taken as well as the specific funding source rules at play.

The process is further complicated by the fact that many federal grant awards for FY2020 and FY2021 are completed and closed. If this is the case, the CAA will not be able to offset salary costs charged to those grants. Further, closeout of the award does not discharge the CAA’s obligation to refund any applicable credits it later receives to the federal awarding agency. 2 CFR 200.345(a)(2).

For CAAs claiming the Employee Retention Credit based on qualified wages that were charged to federal grants, the safest approach is to seek instructions from each funding source that paid all or a portion of the wages to determine how to treat the Credit. We also urge CAAs to reach out to CAPLAW with any questions, particularly ahead of paying any up-front fees tied to the Credit amount the organization could expect to receive.

Beware of Third-Party Credit Schemes

The IRS has issued warnings that employers should be wary of third parties advising them to claim the Credit when they do not qualify. IR-2022-183; IR-2023-49; IR-2023-40; COVID Tax Tip 2022-170; Beware of Employee Retention Credit scammers. Many use aggressive marketing tactics and direct solicitations to push employers to file. Please carefully review Employee Retention Credit guidelines or seek counsel before trying to claim the Credit.

Credit Advances
Certain third-party companies have offered Employee Retention Credit advances, under which employers can receive an advance of the Credit in the form of a loan. Under this arrangement, employers make monthly interest-only payments upon receiving the advance, ending with a balloon payment once the employer receives the Credit. The risk to receiving a Credit advance under this approach is that if the employer does not ultimately receive the Credit, or if the employer must credit tax savings from the Credit back to a federal award, the employer may have a difficult time repaying the loan. Be careful when working with such loan providers, especially as promoters for the Credit continue aggressively promoting various Employee Retention Credit schemes.

This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Award Number 90ET0482-03. Any opinion, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.