How small business is claiming billions in cash refunds from IRS

After restrictions on coronavirus disease (COVID-19), were lifted in Santa Monica, California, June 22, 20,21, a store advertises for employees.

Reuters| Reuters

Small businesses across the country are having trouble keeping employees and attracting new staff in a tight labor marketplace that has given workers the upper hand. The latest nonfarm payroll data on Friday showed that hiring is still hot, with 850,000 more jobs than expected, and wages rising again.

Businesses are being forced into offering higher wages and better benefits to staff up in order to take advantage of the booming economy after Covid. They are also competing with major corporations in the U.S. who have been increasing wages and offering attractive bonuses. Amazon offers a $1,000 sign-on bonus on warehouse jobs; McDonald’s increased its minimum wage in May to $400 and $500, respectively; Chipotle offers an hourly wage of $15 and a referral bonus of $200 for employees; and Amazon offers a $1,000 sign up bonus on warehouse jobs.

This war for talent has been difficult for small businesses that are still trying to recover losses from the coronavirus epidemic. Many are entitled to money back from government via a credit against their employment taxes. The Employee Retention credit (ERC), which gives small and mid-sized businesses cash back on a portion the wages they pay to their employees, is available from the federal government for small and medium businesses.

Many business owners are already benefiting from this. Paychex CEO Marty Mucci stated that the program helps to offset wages, wage rises, and some of the pay for employees they’re bringing on board. “We have already processed more $3 billion in employee retention tax credits. This is cash in their hand to help them out now.”

Yet, many small businesses aren’t aware of it.

“The employee retention credit is one of the major programs that has been largely forgotten,” Sarah Crozier spokeswoman for Main Street Alliance, a small-business advocacy organization. “Many people view a tax credit as a reimbursement that comes later, but it gets paid upfront.”

How the tax credit works

The ERC was established with the first federal Covid economic relief package. It was recently expanded to allow businesses to claim more money from wages paid to employees in 2020 or 2021. Businesses can receive money for wages paid up to the end of 2021 as well as retroactive payments for 2020 wages.

Eligible businesses may claim up to 70% of up to $10,000 in wages paid out to employees or a maximum of $7,000 per employee for each of the quarters of the calendar year. This can add up to $28,000 per employee annually.

The Employee Retention Credit is targeted at small and medium-sized businesses. You must currently have 500 employees to be eligible. Businesses must see a 20% decrease in gross receipts in a quarter of 2021 compared to the same quarter of 2019. If they don’t see this reduction, they will need to have been shut down completely or partially by the government during the quarters they claim the ERC. To be eligible, gross receipts for 2020 CARES Act must be less than 50% of the 2019 calendar quarter gross receipts.

How to make an IRS claim

An employer that has already paid 2020 taxes can use the ERC to reduce their liability and claim retroactively. To receive the ERC money as a refund on taxes paid, businesses must either fill out Form 7200, an advance payment form with the Department of Treasury, or submit it through Paychex.

Crozier stated that many of these businesses have a short cash flow runway and it is important to get as much money as possible now, rather than being reimbursed later in the fiscal year.

The credit can amount up to a dollar for dollar cash refund per employee, per quarter in 2021 (in 2021, it was a credit of up to 50% of the $10,000 maximum per employee annually). Start-ups that were established after February 15, 2020 and had to be shut down may be eligible for a greater credit.

It can reduce employee liability for a current payroll period and the amount of employment taxes that would otherwise have been paid, including federal tax withholding and Social Security and Medicare taxes.

The specific quarter for which a business is claiming the credit — businesses typically file employment taxes quarterly — makes a big difference, and makes 2020 the year during which more labor costs are likely to be eligible, said Tony Nitti, a partner with the tax services group at RubinBrown. This is because business is better in 2021 than in 2020, so the qualification relating to a decline in gross receipts may not be met. Nitti advised businesses to be aware of the requirements and to focus on claiming ERC money only for quarters in which their earnings qualify.

How to count the wages

Only wages that apply to the FICA tax (the U.S. federal payroll taxes) will count towards the cash back incentive. Wages paid to relatives of business owners are not eligible. Eligible wages can include money paid for bonuses to employees in order to compete with McDonald’s and Amazon, but not money used for hiring bonuses.

Businesses that received Paycheck Protection Program loans could not claim the ERC under the first economic relief package. However, they can now as long as they do not include any PPP loan money that was used to pay wages and, importantly, they have not applied to PPP loan forgiveness. Employers have the option of applying for forgiveness on either the PPL loan (or ERC) from their lenders. They can still apply for ERC after they have been denied forgiveness if they apply. ERC eligibility is still available for any wages paid for by PPP loan money.

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