How to find out if your business qualifies for the employee retention tax credit

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

The tax relief – 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.

Although the credit applies to the 2020 or 2021 tax year, business owners still have time to amend returns and claim the credit, which has sparked a flood of announcements from businesses offering their 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 chartered accountant. “Our customers get a ton of it and it just bombs them.”

While Hausz’s company has completed at least 100 amended deposits for customers to claim the employee retention credit, it has also notified customers when they are not eligible.

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

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

Esposito said ERC factories can promise business owners they’re eligible or calculate a bigger credit than what their CPA told them. “It really puts a strain on a lot of customer 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 credit has provided a financial lifeline to millions of businesses, there are promoters who deceive people and businesses into believing they can claim these credits,” the Commissioner said. ‘IRS, Danny Werfel, in a March statement.

One of the challenges of applying for employee retention credit is complexity, with the rules changing between 2020 and 2021, according to Hausz.

The credit was passed to keep workers on the payroll during quarters affected by the Covid-19 pandemic. While eligibility was initially from March 13 to December 31, 2020, the deadline has been extended to the third quarter of 2021 for most businesses.

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

“We’ve done some for customers who’ve had shutdowns, and we’ve done some for revenue drops,” which is easier to calculate, Hausz said.

Additionally, the credit has been extended from 2020 to 2021, originally covering 50% of eligible wages (limited to $10,000 per year per employee), for a maximum credit of $5,000 per employee in 2020. For 2021 , the credit was increased to 70% of wages ($10,000 per quarter per employee), with a maximum value of $7,000 per quarter or $28,000 per year.

One of the challenges of claiming employee retention credit retroactively is that business owners also have to change other statements, Esposito said.

While the process begins with Form 941-X — the Adjusted Payroll Tax Return — the changes trickle down to business and individual tax returns, “creating a cascading effect,” she said.

Hausz said the “big problem” with new companies claiming to help companies get this unique credit is that they might not sign the amended statements, to avoid future liability. “Don’t file this unless the people helping you are willing to put their name on the record as a 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 that the agency is stepping up enforcement of those 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 companies that I know personally that would do the credit and sign their name on it.”