Methods to know if your small business qualifies for worker retention tax credit score

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Small businesses are facing an onslaught of ads, phone calls and emails to help them claim a pandemic-era tax credit. However, experts urge business owners to review eligibility with a qualified tax professional.

The tax break — known as the employee retention credit, or ERC — was enacted in 2020 to support small businesses during the Covid-19 pandemic, worth up to $5,000 per employee for 2020 or $28,000 per employee in 2021.

While the credit applies to tax year 2020 or 2021, business owners still have time to amend returns and claim the credit, which has sparked a flood of ads from companies offering to help.

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“The calls and solicitations are brutal,” said certified financial planner Craig Hausz, CEO and managing partner at CMH Advisors in Dallas. He is also a certified public accountant. “Our clients are getting a tone of these and it’s just bombarding them.”

While Hausz’s company has completed at least 100 amended filings for clients to claim the employee retention credit, it has also informed clients when they don’t qualify.

“ERC mills” have popped up, charging small businesses up to 25% to 30% of the credit received, said Kristin Esposito, director for tax policy and advocacy for the American Institute of CPAs.

“There’s a huge monetary incentive,” she said.

It’s really put a strain on a lot of client relationships.

Kristin Esposito

Director for tax policy and advocacy for the American Institute of CPAs

Esposito said ERC mills may promise business owners they qualify or calculate a larger credit than owners were told by their CPA. “It’s really put a strain on a lot of client relationships,” she said.

After warning business owners about “third parties” promoting the employee retention credit in October, the IRS added the issue to its annual list of “Dirty Dozen” tax scams for 2023.

“While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits,” IRS Commissioner Danny Werfel said in a March statement.

How to qualify for the employee retention credit

One of the challenges of claiming the employee retention credit is complexity, with rules having changed between 2020 and 2021, according to Hausz.

The credit was enacted to keep workers on payroll during the quarters affected by the Covid-19 pandemic. While eligibility was initially from March 13 through Dec. 31, 2020, the timeline was extended through the third quarter of 2021 for most businesses.

To qualify in 2020, businesses needed a government-mandated full or partial shutdown, or a “significant decline” in revenue, according to the IRS, with “less than 50% of gross receipts,” compared with the same calendar quarter in 2019. For 2021, the revenue thresholds dropped to “less than 80% of the same quarter” in 2019.

“We’ve done some for clients that had shutdowns, and we’ve done some that had revenue decreases,” which is easier to calculate, Hausz said.

Further, the credit was expanded from 2020 to 2021, originally covering 50% of qualified wages (limited to $10,000 annually per employee), for a maximum credit of $5,000 per employee in 2020. For 2021, the credit jumped to 70% of wages ($10,000 quarterly per employee), worth up to $7,000 per quarter or $28,000 per year.

Why it’s important to work with a tax professional

One of the difficulties of retroactively claiming the employee retention credit is business owners also must amend other returns, Esposito said.

While the process begins with Form 941-X — the adjusted payroll tax return — the changes flow down to business and personal income tax returns, “creating a cascade effect,” she said.

Hausz said the “big issue” with newer companies claiming to help businesses get this single credit is that they might not sign the amended returns, in order to skirt future liability. “Do not file this unless the people helping you are willing to put their name on the filing as the paid preparer,” he warned.

In the March statement, IRS Commissioner Danny Werfel warned that taxpayers are “ultimately responsible for the accuracy of the information on their tax return” and the agency is stepping up enforcement for these claims.

Hausz added that taxpayers should “go talk to a qualified professional,” such as a CPA, enrolled agent, tax attorney or financial advisor. “There are literally hundreds of firms that I know personally that would do the credit and sign their name on it.”

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