Employee Retention Tax Credit
How do you best take advantage of this pandemic-related tax credit? Before you assume it’s not for you, or that you’ve already used the Employee Retention Tax Credit to its full potential, consider that there may be more benefits to be had.
Since the Employee Retention Tax Credit was introduced in 2020, it has been underutilized by business taxpayers across the country. While you’ve been busy navigating health restrictions, managing supply chain issues, and keeping your business afloat, you may have missed out on this refundable tax credit, designed to help U.S. businesses.
Let’s take a closer look at this important tax credit. With its inherent flexibility and broad scope, it is critical to make sure you’re making full use of its provisions.
What is the Employee Retention Tax Credit?
In March 2020, the U.S. Congress signed a far-reaching bill into law, hoping to provide economic relief from the impact of the pandemic. The Coronavirus Aid Relief and Economic Relief Act (CARES Act) was unprecedented in scope, providing more stimulus than any other legislation in U.S. history.
The CARES Act included $500 billion in payments to Americans as well as over $500 billion in both industry and small business loans. In addition, there were several changes to tax credits, deferrals, and deductions.
One of the most important tax changes was the introduction of the Employee Retention Tax Credit. Employers impacted by Covid were offered a tax credit equal to 50% of qualified wages, to a maximum of $5,000 per employee, paid between March 13 and December 31, 2020. This was enhanced for 2021 to 70% of qualified wages, to a maximum of $7,000 per employee per each qualifying quarter of 2021.
Initially, the purpose of the Employee Retention Tax Credit was to encourage employers to keep staff on their payroll, avoiding large-scale layoffs during a time of widespread uncertainty. Since then, there have been changing rules and dates, leaving many business owners wondering if they can still apply for the credit.
One significant change enacted by the Consolidated Appropriations Act of 2021 opened the availability of the Employee Retention Tax Credit to Paycheck Protection Program recipients, which was not allowed in the CARES Act.
Is it Too Late to Use the Employee Retention Tax Credit?
Maybe your business has nearly recovered from the impact of the pandemic. Maybe you’re struggling to get back to pre-pandemic revenue levels. In either case, if you’ve just learned of the Employee Retention Tax Credit, you may be wondering if it is too late to use this refundable credit the next time you file your taxes.
The answer is no. Although the program ended for wages paid after December 31, 2021, there is still time to claim the credit, if your business meets certain criteria. As long as the statute of limitations remains open—generally, three years from the original return due date—you can claim the credit on an amended 941-X payroll tax return: Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Is it worth your effort to file amended returns? Remember, the refundable tax credit is 50% of up to $10,000 in wages paid in 2020 and 70% of up to $10,000 in wages paid per qualifying quarter in 2021, per employee. This can add up to a significant refund, especially with higher numbers of employees on staff.
Do You Qualify for the Employee Retention Tax Credit?
To qualify for the Employee Retention Tax Credit in your 2022 filing, your business will need to meet several criteria. You’ll need to have five or more W-2 employees for the year 2020 and/or 2021, for example, and you’ll need to prove that Covid hurt your business, through criteria such as:
- Governmental orders reducing business hours or enforcing capacity limitations
- Governmental orders enforcing a partial or full shutdown of your operations
- Supply chain disruptions due to Covid-related business conditions
- Revenue reductions that meet the decline in gross receipts test.
- Businesses that began operations after February 15, 2020, automatically qualify
If you can show that Covid has had an impact on your business via any of the criteria above, and explain why, you will be in a good position to qualify for the Employee Retention Tax Credit for wages paid in 2020 and 2021.
How is it Different than Other Refundable Tax Credits?
A key feature of the Employee Retention Tax Credit is its wide access. While many tax credits are limited in scope, this refundable credit was written into national legislation and can be applied very broadly, provided your business qualifies.
When first considering the impact of Covid on your business, you might take a high-level approach. For example, you might think how reduced hours, business shutdowns, or supply chain disruptions may be pathways to claim this employment the credit.
It’s worth examining the tax credit closely, however, as it offers a fair amount of flexibility in some of the more nuanced criteria. Supply chain disruption, for example, can be viewed with a wide lens. Consider how disruptions in the supply chain of inventory, parts, supplies or any other business requirement have had more than a nominal effect on your operations or have caused a decline in revenue.
When considering the eligibility of your business for the Employee Retention Tax Credit, it is important to keep a broad perspective. Virtually every business felt the impact of the Covid pandemic in one way or another. How did it manifest in the operations of your business?
If you are having trouble remembering all the ways the pandemic may have impacted your business, consider having an employee brainstorming session. This is especially useful if you have employees on staff who were with you before, during and since the early days of the pandemic.
Key Takeaway Points
The Employee Retention Tax Credit has been widely under-used by business owners in both 2020 and 2021. To make sure you make the most of this tax credit, keep these takeaway points in mind:
- the Employee Retention Tax Credit was originally part of the 2020 CARES Act, designed to help U.S. business owners to keep their employees on the payroll
- it’s not too late to claim the Employee Retention Tax Credit; you can retroactively claim this credit on an amended 941-X payroll tax return
- when you consider the impact the pandemic had on your business, remember to use a wide-angle lens—think about everything from revenue reduction to supply chain disruptions and limitations by government orders
- if you struggle to remember everything that changed, consider engaging your staff to think about every operational change that went into effect from March 2020 – September 2021
With changing rules and regulations, sunset dates, and the possibility of retroactive claims, it can be hard to stay current with U.S. tax laws, credits, deductions and allowances. The most important step you can take is to work with an experienced team of tax experts, who are constantly updating with current laws and regulations.
At Franskoviak Tax Solutions, we have helped thousands of clients with tax planning for more than 30 years. We provide comprehensive tax services with first-class expertise and a personalized, boutique-style approach. Speak to our team about personal and business taxes, payroll taxes, IRS tax relief and tax problems such as IRS tax notifications, payroll tax debt, delinquent taxes and more.
Start with a free consultation—we’re here to help you minimize your overall tax burden by maximizing tax credits such as the Employee Retention Tax Credit.