Many eligible small businesses have not yet applied for a very impactful tax credit that can provide tens of thousands of dollars or more back to employers in the form of a payroll tax credit.
The Employee Retention Tax Credit, which is still open and available, was passed under the CARES Act in 2020 as an incentive for businesses to continue paying employees during the COVID-19 pandemic. The ERTC provides tax refunds based on wages paid to employees during 2020 and 2021.
Businesses should contact both their accountant and their payroll provider for assistance and to discuss the full requirements of the ERTC.
Private-sector employers and tax-exempt organizations may qualify for the ERTC for one of three reasons. One reason is if the business experienced a full or partial suspension or shut down during a quarter under a governmental order due to COVID-19. This may apply to businesses like bars and restaurants, hairdressers, entertainment venues and dental practices that were ordered to close during 2020 or 2021. Another reason is if the business experienced a significant decline in gross receipts in a quarter as compared to 2019. Most businesses meet this qualification due to business declines during the pandemic. The final reason is if the business is a Recovery Startup Business, as defined by the IRS.
Once a business determines eligibility, refunds are requested by filing Form 941-X returns for each eligible quarter.
The refund amounts from the ERTC can be significant. For 2020, the refund can be as much as $5,000 per employee. For 2021, the refund can be as much as $21,000 per employee.
There are numerous misconceptions about the ERTC, which may prevent small businesses from applying for the credit. A business owner may think, “My business does not qualify for the ERTC because we received a PPP loan in 2020.” This is false (although it used to be true). Businesses that received PPP loans are allowed to claim the ERTC, but the same payroll wages cannot be used for both PPP forgiveness and the ERTC.
Another misconception is, “I only have a few employees. It is not worth it to apply for the ERTC.” This is also false. For example, if an employer paid six employees who were eligible for the full credit, the refund would be $30,000 for 2020, and $126,000 for 2021. The more employees paid, the greater credit for the employer.
Small businesses should explore the ERTC, as it is not too late to take part in this worthwhile program. Businesses have until early 2024 to file for the tax year 2020 and until early 2025 to file for the tax year 2021.
Anne Bahr is an operations support manager at Ahola Payroll & HR Solutions in Brecksville.
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