The pandemic’s economic impacts are undeniable. Small and midsized businesses (SMBs) underwent significant issues. Almost a quarter of them reported large negative effects, and over 10% said they reduced employment.
The federal government stepped in with one of its most substantial stimulus programs, offering a generous tax credit under the Coronavirus Aid, Relief and Economic Security (CARES) Act.
What Is the Employee Retention Credit?
The Employee Retention Credit (ERC), or the Employee Retention Tax Credit (ERTC), allows eligible companies and nonprofit organizations to receive a refundable tax credit for certain payroll expenses during the pandemic.
The maximum credit per qualifying employee is $5,000 each for 2020. Additional legislative changes raised the credits to $7,000 per quarter per employee for the first three quarters of 2021. That’s a total of up to $26,000 per eligible employee during this time frame.
Who Qualifies for the ERC?
Generally speaking, a company or tax-exempt organization may be eligible if it meets any of the following:
- Government orders forced the business to fully or partially shut down in 2020 or the first three quarters of 2021.
- The business had a certain reduction in gross receipts in 2020 or the first three quarters of 2021.
- The organization qualified as a recovery startup business for the third or fourth quarters of 2021.
To apply for the ERC, the employer must have paid qualified wages between March 12, 2020, and December 31, 2021.
It’s important to keep in mind that:
- Not every pandemic-related wage expense qualifies.
- Not every employee will qualify for the maximum $26,000 credit.
- Not every government-issued mandate applies.
The actual credit amount will vary based on numerous factors, including the timing and nature of the business impact. Those who received money or loan forgiveness under the Paycheck Protection Program (PPP) may also see eligibility or credit amount adjustments.
According to the Internal Revenue Service (IRS), qualified wages typically exclude payroll expenses associated with shuttered-venue grants or restaurant revitalization incentives. Consulting an experienced tax professional can help you determine your eligibility and potential credit.
How Does the ERC Work?
Eligible employers can use the credit to reduce their payroll tax due. Doing so helps offset the financial burden of taxes for companies that retained employees and continued paying wages despite a challenging business environment in 2020 and 2021.
If your organization is eligible but has yet to claim the credit, you must file amended tax information with the IRS. Different forms exist based on factors like your filing period and employer type. A Polston Tax Resolution & Accounting tax professional will help you navigate the process.
How Does the ERC Affect My Tax Return?
There are several factors to consider when claiming the ERC and weighing its effects on your tax return.
It’s Not Reportable as Taxable Income
The ERC is a refundable tax credit, qualifying it as nontaxable income under the Internal Revenue Code (IRC). As a result, you do not add any eligible amounts your business receives to your company’s income when you or your tax professional calculate it.
It Can Still Impact Your Business’s Tax Liability
Businesses that qualify for and receive the ERC must readjust their deduction for payroll expenses for any quarter involved.
For example, imagine your company reported $100,000 of deductible payroll expenses for an eligible quarter in 2021. If you had three qualifying employees in the first quarter, you could receive up to $21,000 in tax credits. You or your tax professional must then file an amended quarterly return with the IRS that reduces the $100,000 deduction by the $21,000 credit. Doing so will adjust your eligible payroll-related expenses for the quarter to $79,000.
As a result of the modification, your business’s total income for the quarter will likely also change. Any increase in that amount may be subject to taxation. If so, your organization may have to pay any additional tax obligations due for the quarter when it files the amended return. You’ll typically need to send this extra money before receiving the refund credit. Due to long processing times, this expense can affect your company’s cash flow for several weeks or months.
A tax professional can help determine the unique impacts of your business’s ERC receipts and income adjustments.
How Will I Receive My Employee Retention Credit Refund?
Those who qualify for and claim the ERC can choose their preferred payment method — direct deposit to their company bank account or physical check.
It’s worth noting that each Form 941-X you or your tax professional filed is processed separately by the IRS and in the order received. The agency is also working diligently to prevent fraudulent claims, which has further extended processing time.
Due to these circumstances and IRS staffing shortages, you should expect separate per-quarter payments, and processing delays may occur. As of August 2023, the IRS still had a backlog of 556,000 Forms 941-X to review. Employers can confirm receipt and potentially check their refund status by calling the IRS at 800-829-4933. You can also ask your tax professional to inquire on your behalf.
Why Choose Polston Tax?
Businesses and nonprofit organizations nationwide have partnered with us since 2001 because:
- We have the experience: Our team boasts over 100 years of collective tax experience and in-depth tax law knowledge.
- We make it hassle-free: We take the stress out of claiming the ERC through amended filings.
- We know how to help SMBs: Tax law is all we do, and we leverage our skills as an SMB to help our fellow SMBs.
- We take a team approach: We work together for you as a team to provide access to everyone’s knowledge and experience.
Contact a Polston Tax Professional Today
Let us help you determine your eligibility and potential credit. Contact us online, or call 844-841-9857 to request a consultation.
Additional Readings
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