How Small Businesses Claim Billions in IRS Cash Refunds

ByRichard C. Sloan

Jul 4, 2021

A store advertises for employees, after restrictions on coronavirus disease (COVID-19) were lifted, in Santa Monica, Calif., On June 22, 2021.

Lucy Nicholson | Reuters

Small businesses across the country are struggling to keep their employees and attract new employees in a tight labor market that has given workers the edge. The latest non-farm payroll report released Friday showed hires remain warm, with 850,000 better-than-expected jobs added in June by employers, and wages rising again.

Companies are forced to offer higher wages and more employee benefits and profit from a booming post-Covid economy. And they are competing locally with a lot of big companies across the United States that have raised wages and offered attractive bonuses. Amazon is offering a $ 1,000 login bonus for certain warehouse jobs; McDonald’s increased its minimum wage in May and now offers bonuses of $ 400 and $ 500 for certain positions; Chipotle offers an average hourly wage of $ 15 and a referral bonus of $ 200 for existing employees.

This war for talent has been tough on small businesses still trying to recover from losses suffered during the coronavirus pandemic. But many are entitled to get government money back through a credit against the employment taxes they pay. Small and medium-sized businesses can get money directly from the federal government through the Employee Retention Credit (ERC), which offers businesses a rebate on a percentage of wages paid to their employees.

Many business owners are already taking advantage. “It helps them offset salaries, pay increases, as well as part of the pay for the new employees they hire,” Paychex CEO Marty Mucci told Jim Cramer on “Mad Money” last Tuesday. “from CNBC. processed over $ 3 billion in employee retention tax credits, which is money in their pockets to help them right now. “

Yet many small businesses don’t know this.

“One of the main programs that has been largely unknown is the Employee Retention Tax Credit,” said Sarah Crozier, spokesperson for the Main Street Alliance, a small business advocacy organization. “A lot of people think of a tax credit as a refund coming in later, but it’s prepaid.”

How the tax credit works

The ERC started with the first federal Covid economic aid program, and it was recently expanded to give businesses the ability to claim more money from the wages they paid employees in 2020 and 2021. companies can get money for wages paid until the end of 2021 and retroactive payments for wages 2020.

Eligible businesses can claim up to 70% reimbursement on a maximum of $ 10,000 in salaries paid to employees, or a maximum amount of $ 7,000 per employee for each quarter of the calendar year. This represents a potential total of $ 28,000 in cash back per employee each year.

the Employee retention credit is intended for small and medium-sized businesses, as you must currently have 500 or fewer employees to be eligible. In addition to the employee threshold, companies are currently facing a 20% reduction in gross revenue in a quarter of 2021 compared to the same quarter in 2019, or if they had not seen this reduction, companies should have be partially or totally closed by the government during the quarters for which they claim the ERC. The CARES 2020 law required that gross revenue in a calendar quarter be less than 50% of gross revenue from the same calendar quarter in 2019 to be eligible.

How to make an IRS claim

For an employer who has already paid 2020 taxes, the ERC may reduce their overall liability and cash claimed retroactively. To get the ERC money back in the form of a refund of taxes already paid, the company must complete an early payment form, or Form 7200 with the Treasury Department’s Internal Revenue System, or they can process it through a payroll company like Paychex.

“A lot of these companies have short cash runs, and it’s really important to get that much money now rather than paying it back later in the year,” said Crozier.

The credit can amount to a dollar-for-dollar cash refund up to a maximum of $ 7,000 per employee, per quarter, in 2021 (in 2020, this was a credit of up to $ 50 % of a maximum of $ 10,000 per employee, annually). Start-ups created after February 15, 2020 and forced to close may be granted greater credit.

For an ongoing pay period, this can reduce the liability per employee and the amount of labor tax that would otherwise have been paid, including federal income tax withholding, Social Security taxes and d ‘Health Insurance.

The specific quarter a business claims the credit for – businesses typically file employment taxes quarterly – makes a big difference and makes 2020 the year in which more labor costs are. likely to be eligible, said Tony Nitti, tax services partner. group at RubinBrown. Indeed, the activity is much better in 2021 than it was in 2020, so the qualification linked to the decrease in gross revenue compared to 2019 may no longer be met. Nitti said businesses should keep the requirements in mind and focus on claiming ERC money only for the quarters in which they qualify.

How to count wages paid

Wages only count toward this cash back incentive if they apply to FICA tax, which is the federal payroll tax in the United States, and wages paid to parents of a business owner are not eligible. Although the money used for hiring bonuses to compete with people like Amazon and McDonald’s can be considered eligible salaries for the ERC.

The first economic aid plan did not allow companies receiving Paycheck Protection Program loans to claim ERC, but they can now as long as they exclude any PPP loans used to pay wages and, above all, did not request the cancellation of the PPP loan. This is because employers have the choice of requesting a discount on the PPL or ERC loan. If they ask for forgiveness and are refused, they can always ask for the ERC afterwards. And in addition, all salaries other than those paid by PPP loan funds are still eligible for ERC.

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