If your business is still navigating the financial challenges of the COVID-19 pandemic, you could find some financial relief through the Employee Retention Tax Credit (ERTC). Steven Nicokiris, a certified public accountant (CPA) and managing director and shareholder with CBIZ & Mayer Hoffman McCann, talks with small business owners every day who aren’t aware of this tax credit.
“Thousands of businesses are still struggling from lost revenue during the pandemic when they could get tax credits – meaning cash refunds – for thousands of dollars per employee,” says Steven. Here’s what you can do to claim the 2021 employee retention credit to help your business grow and thrive.
What is the Employee Retention Tax Credit?
Per Steven, the ERTC is a new federal tax credit that provides immediate reductions to payroll taxes and possible cash refunds to both commercial and not-for-profit employers. You can also claim this credit if you obtained a Paycheck Protection Program (PPP) loan.
The credit is equal to 50% of qualified wages and health-plan expenses (up to $10,000 per employee) paid after March 12, 2020, through December 31, 2020, and 70% (up to $10,000 per employee per quarter) paid from January 1, 2021, through December 31, 2021.
To be eligible for the 2020 credit, your business needed to experience a 50% decline in gross receipts for any quarter versus the same quarter in 2019. For the 2021 employee retention credit, the eligibility requirements were significantly reduced. Your business only needed to experience a 20% decline in 2021 gross receipts for any quarter versus the same quarter in 2019.
Alternatively, your business is eligible for the ERTC in 2020 and 2021 if it was fully or partially shut down due to a government mandate during the pandemic, even if you didn’t experience a significant decline in gross receipts. A critical update to the program is that you can claim the credit if you received PPP loans in 2020 and 2021
A critical update to the program is that you can claim the credit if you received PPP loans in 2020 and 2021
How to claim the Employee Retention Tax Credit
1. Determine if your small business is eligible
In general, if your business had 500 or fewer employees in 2019, and was impacted by the pandemic, you should explore the ERTC. You should also look into this credit if your business was partially or fully closed due to government mandates, or experienced resulting revenue decreases during the pandemic.
Steven has seen the ERTC provide huge benefits to the businesses he works with. One business received about $60,000 for 2020 and another $60,000 in the first quarter of 2021, while another received about $30,000 for 2020 and another $30,000 in the first quarter of 2021. These were both small businesses with a dozen or fewer employees and annual revenue in the lower six figures.
These cash refunds make a real difference. That’s why every business with employees – retail shops, restaurants, bakeries and cafes, hospitality, travel, and anyone else that lost business – should look into the program. “For many small businesses, this can be the lifeline that strengthens your financial foundation today and enables you to focus on future growth,” Steven explains.
2. Ask your CPA, accountant or bookkeeper to help get it for your business
“If your business is eligible, then your accountant will help you get it,” says Steven. “But don’t assume that they’ve already looked into it for you. Be proactive. We’re talking about a lot of money in tax credits that you could otherwise leave on the table.”
Talk with someone who is an expert in this area. Otherwise, there’s a chance that you could miss out on significant savings.
Remember that the ERTC is a payroll-based tax credit and, therefore, the claim is filed as part of your quarterly payroll tax returns. If you use a third-party payroll service provider (such as ADP or Paychex) to process your payroll, you’ll need to coordinate the ERTC claim with them.
3. Businesses that received PPP loans and other grants are eligible for the ERTC
“When the CARES Act was first passed in March 2020, business owners had to choose to take forgivable PPP loans or claim the ERTC – by law you couldn’t use both – and the overwhelming majority of employers went for PPP loans,” Steven explains.
However, this changed with the Consolidated Appropriations Act. It amended the original restriction and allowed small businesses with PPP loans to also claim the ERTC, with the caveat that you couldn’t “double-dip.” This means that the same eligible wages paid from PPP loans can’t also be claimed against the ERTC.
“You’ll want to work through it with your accountant, but the most important point is that receiving PPP loans doesn’t automatically disqualify you for the ERTC anymore,” says Steven.
Additionally, other federal grant programs, like Shuttered Venue Operators Program (SVOG) and Restaurant Revitalization Fund (RRF) grants, work similarly to PPP loans for this tax credit. Given this, be sure to present all the funding you received to your accountant, who will then work on the optimal tax-relief strategy for you.
4. Be sure to do a retroactive look for the 2020 employee retention credit
Make sure you and your accountant or bookkeeper take a retroactive look at 2020 as well. If you had a big decrease in gross receipts on a quarterly basis or you were shut down (partially or fully) by government order, you may qualify for the 2020 employee retention credit.
“The bottom line is that every small business with employees may be eligible for the ERTC and you have to explore it. And if your tax professional isn’t certain about how to help, don’t be afraid to try another – speak to someone who knows about it. Don’t let it go” says Steven.
5. Recovery startup businesses are also eligible
If you started your business during the pandemic, you might also qualify for the employee retention tax credit as a recovery startup business. To qualify, your business needed to start after February 15, 2020 and have annual gross revenue of less than $1,000,000. If your business qualifies, you may be able to get a credit up to $50,000 per quarter for the third and fourth quarters of 2021. Talk with your bookkeeper or tax preparer to go over the details and ask them to walk you through the process.
6. You can still apply for the Employee Retention Tax Credit
The deadline for filing Employee Retention Tax Credit refund claims was extended, which means if you haven’t applied yet there’s still time. You can now file an amended 941-X for 2020 ERTC refund claims until April 15, 2024 and until April 15, 2025, for 2021 ERTC refund claims.
Keep in mind that the refunds you get from the ERTC are taxable, so you’ll also have to amend your business’s income tax returns. The IRS has noticed businesses aren’t reducing their wage deductions on their federal income tax returns by the amount of the ERTC credit that they receive, so be sure to accurately adjust your figures.
If you unintentionally overstated your wage deductions, you can file an amended tax return so your business isn’t penalized.
Beware predatory “tax incentive” businesses
According to Steven, the popularity of the ERTC caused a wave of predatory “tax incentive” businesses that are targeting small businesses. Many of them will qualify you even if you’re not eligible for the credit. Working with these businesses could cause your business to lose thousands of dollars and leave you open to possible penalties and fines. The IRS has been hiring and training staff to audit ERTC claims more thoroughly as a result
Pursuit can help
The 2021 employee retention credit can mean thousands of dollars per employee refunded to your business. If you’d like to explore additional funding opportunities to help your business move forward, contact us today to see how we can help you. Every day, we work to help small businesses plan for success and get the funds you need to build – and rebuild – your dream.