How to find out if your company is eligible for an employee retention tax credit
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Small businesses are facing a barrage of ads, phone calls and emails trying to help them claim a pandemic-era tax credit. However, experts strongly advise entrepreneurs to have their eligibility checked by a qualified tax advisor.
The tax break – known as Employee Retention Creditor ERC – was enacted in 2020 to support small businesses during the Covid-19 pandemic, with a value of up to $5,000 per employee in 2020 or $28,000 per employee in 2021.
Although the credit applies to the 2020 or 2021 tax year, business owners still have time to amend their tax returns and claim the credit, which has led to a flood of advertisements from companies offering to help.
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“The calls and pleas are brutal,” said certified financial planner Craig Hausz, CEO and managing partner at CMH Advisors in Dallas. He is also a certified public accountant. “Our customers get a lot of it and it just bombards them.”
While Hausz’s company submitted at least 100 amended applications for customers to claim the employee retention credit, it also notified customers when they were ineligible.
“ERC mills” emerged, charging small businesses up to 25% to 30% of the loan they received, said Kristin Esposito, director of tax policy and advocacy at the American Institute of CPAs.
“There is a huge financial incentive,” she said.
It’s a real strain on many customer relationships.
Kristin Esposito
Director of Tax Policy and Advocacy at the American Institute of CPAs
Esposito said ERC mills may promise business owners that they qualify or charge a higher loan than the owners were told by their CPA. “It’s a real strain on a lot of customer relationships,” she said.
After warning business owners about “third parties” promoting employee retention credit in Octoberthe IRS has added the issue to its Annual list from “Dirty Dozen” tax scams for 2023.
“While the credit provides a financial lifeline for millions of businesses, there are sponsors who mislead people and businesses into believing they can claim these credits,” IRS Commissioner Danny Werfel said in a statement March statement.
How to qualify for the employee retention credit
One of the challenges of claiming the employee retention credit is the complexity as the rules have changed between 2020 and 2021said Hausz.
The credit was introduced to keep workers on the payroll during quarters affected by the Covid-19 pandemic. While eligibility was originally from March 13 to December 31, 2020, the period has been extended to the third quarter of 2021 for most companies.
To qualify in 2020, businesses needed a government-ordered full or partial closure or a “significant decline in revenue,” it said the IRSwith “less than 50% of gross receipts,” compared to the same calendar quarter in 2019. For 2021, the revenue thresholds dropped to “less than 80% of the same quarter” in 2019.
“We did some for customers that had shutdowns and others that had sales declines,” which was easier to calculate, Hausz said.
Additionally, the credit was expanded from 2020 to 2021 and originally covered 50% of qualified wages (limited to $10,000 per year per employee), bringing the maximum credit to $5,000 per employee in 2020. For 2021, the credit jumped to 70% of wages ($10,000 quarterly per employee), worth up to $7,000 per quarter or $28,000 per year.
Why it’s important to work with a tax professional
One of the difficulties with retroactively claiming the employee retention credit is that business owners must also amend other declarations, Esposito said.
While the process begins with Form 941-X – the adjusted payroll tax return – the changes affect corporate and individual income tax returns, “creating a cascading effect,” she said.
Hausz said the “big problem” with newer companies claiming to help businesses obtain this single loan is that they may not sign the amended returns to avoid future liability. “Do not submit this unless the people helping you are willing to put their name on the submission as a paid creator,” he warned.
In the March statementIRS Commissioner Danny Werfel warned that taxpayers are “ultimately responsible for the accuracy of the information on their tax return” and the agency is increasing enforcement of those claims.
Hausz added that taxpayers should “speak with a qualified professional,” such as an accountant, registered agent, tax attorney or financial advisor. “There are literally hundreds of companies that I know personally that would take the loan and sign their name to it.”
