February 3, 2023
6 Really Important Things to Know About the Employer Retention Credit
At Avidia, we’re big on honesty and keeping our promises. And as part of our promise to provide insights and guidance to help business owners reduce and manage taxes, we’re coming at you with another helpful blog.
In this installment, Dave McLaren, CPA, CGMA, CRFAC, ABGOV, RFI, CRFAU, and AAGG (all-around good guy) of McLaren & Associates, CPAs PC, shares some important information on the Employer Retention Credit.
Established as part of the CARES Act for COVID-19 relief, the credit was designed to encourage businesses to keep employees on their payroll versus laying them off.
The credit could provide thousands even hundreds of thousands of dollars in relief for business owners impacted by COVID. But, there are some serious pitfalls.
To help you understand the credit, Dave has shared these 6 really important things to know:
1. Not every business is eligible for the Employer Retention Credit. If you have a business, there’s a pretty good chance you may have received a call or email from a company informing you about the tax credit and telling you that you’re already eligible to receive free money.
Don’t believe them.
To qualify for the credit, you must meet one of the following key requirements:
- Your business must have been fully or partially closed by the government during the pandemic. So, for example, if you owned a restaurant in Massachusetts during the pandemic, chances are you meet this requirement:
- In any quarter in 2020, your company’s revenue/sales was lower than 50% or more compared to the revenue/sales for the same quarter in 2019.
- In any quarter of 2021, your sales/revenue was lower than 20% or more compared to the same quarter in either 2020 or 2019.
2. Understand how the credit is calculated. If you meet the requirements, here’s how the credit you are eligible for is calculated:
- For 2020, you can receive a credit for the first 50% of what you paid each employee. So, if you have one employee and paid them $10,000 during a quarter, you could receive a $5,000 credit. That $10,000 counts for the entire year for your employee.
- For 2021, you can receive a credit for up to 70% percent of the salary you paid each employee per quarter. So, that employee who earned $10,000 in that quarter would be eligible to receive $7,000. If that employee earned $10,000 in Q2 and Q3, they would also be eligible for the $7,000 in those quarters as well for a total of $21,000. In essence, you could file for the credit for Q1, Q2, and Q3 but only for employees. Wages for business owners are not eligible for the credit nor are wages that have been paid by PPP loans.
3. Don’t trust companies you don’t know looking to help you file. The credit, which can be a very good thing for business owners, has resulted in a not-so-good thing: unscrupulous companies calling on business owners to tell them they are eligible, even when they aren’t.
“I get about four emails a day telling me that McLaren & Associates is eligible,” says Dave. “They know nothing about our business or our revenue.”
These companies can be very convincing. They’ll tell you that they will do all the work for you and that it will cost you nothing in exchange for a commission. That commission gives them an added incentive – to make it look like you’re eligible or to file for more than you’re eligible for, all so they can line their greedy, fraudulent pockets.
4. The IRS has made the Employer Retention Credit a big focus for audits. “Normally, the IRS can only go back three years for an audit. For this, they’ve extended that time period to six years,” shares Dave.
The IRS also intends to not only fine small business owners that erroneously file, but also to prosecute them. So, if one of those shady companies files fraudulently on your behalf, you and your business are at risk.
5. Talk to a trusted and licensed professional. If you believe you meet the requirements, Dave urges you to talk to your accountant or a licensed professional to ensure that you are indeed eligible and to ensure that you file properly.
Dave has another piece of advice: “Don’t file for the credit on your own. It essentially requires you to amend your tax returns, which can be very difficult.”
6. Prepare to pay taxes if you receive funds. If you are eligible and file, make sure you understand that unlike with PPP loans, the income you receive is taxable and must be reported as income on your business tax return.
Looking to learn more? Talk to an expert like, say, Dave.
The Employer Retention Credit can be a great way to earn income for your business, if you are eligible. To learn more, you can call Dave McLaren at (508) 842-0459.