Small Businesses Can Still Claim Thousands of Dollars in Tax Credits. Here's How to Take Advantage

Here's how to claim up to $33,000 per employee in tax credits.

The COVID-19 pandemic took an immense toll on small businesses across the world. Many were forced to shut down, resulting in significant losses in revenue and millions of employees who were laid off or furloughed. One of the benefits of the CARES Act was to provide these small businesses with an employee retention tax credit to encourage them to keep employees on their payroll.

Although the program has ended, The American Rescue Plan made some big changes and is still allowing eligible small businesses to claim the credit retroactively. Here's how you can still take advantage of the Employee Retention Credit (ERC) and get up to $33,000 per employee.

What is the Employee Retention Credit?

The ERC is a refundable tax credit for businesses that continued to pay their employees while impacted due to the pandemic. It is equal to 50% of qualified wages up to $10,000 for 2020 and 70% of qualified wages and certain healthcare expenses up to $10,000 for 2021. The Infrastructure Investment and Jobs Act retroactively ended the ERC program as of Sept. 30, 2021 (Q3), except for recovery start-up businesses, which remain eligible through December 2021 (Q4). The IRS defines a "recovery business" as a business that started after Feb. 15, 2020.

As an example, eligible employers can claim up to $5,000 per employee during 2020 and $7,000 for the first three quarters in 2021. This comes out to potentially receiving up to $26,000 per employee. If you own a recovery business, you can qualify for an additional $7,000 for Q4 of 2022, bringing your potential total to $33,000. This amount comes in the form of a direct payment that is non-taxable. It comes from the employer's portion of their Social Security and Medicare taxes.

Eligibility requirements

To be eligible for the ERC credit, businesses must meet certain criteria:

• Sustained a full or partial suspension of business operations due to COVID-19 and orders from an appropriate governmental authority OR
• Experienced a significant decline in gross receipts during 2020 OR
• Experienced a decline in gross receipts during the first three quarters of 2021 OR
• Qualified in the third or fourth quarters of 2021 as a recovery start-up business.
• Paycheck Protection Program (PPP) loans that any business received must be deducted against the ERC, so businesses do not double dip. This is a big change from before, where businesses who had received PPP loans could not apply for the ERC.

Another big change from the original CARES ACT is that a business no longer has to have fewer than 500 employees. Plus, a paid leave credit has been added. You can visit the IRS website for more information. With numerous changes made the past several years, it is important to verify eligibility with a tax professional.

How can businesses claim the credit?

If you are an eligible business that has not claimed or incorrectly claimed the ERC, you can amend your quarterly employment tax returns (Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund). You can file claims for unclaimed credits for 2020 until April 15, 2024, and for 2021 until April 15, 2025. After you submit your amended returns, you can expect to receive the refund in six to eight weeks. It will be deposited in your business bank account after you have filed.

Employers are required to submit documentation, such as payroll reports and copies of Form W2s, as proof that wages were paid during the period covered by the ERC credit. It is important that businesses keep all records related to filing taxes related to this credit, as these will be needed if an employer is audited by the IRS at a later date.

IRS issues ERC warning

On March 7, 2023, the IRS issued another warning urging people to carefully review the Employee Retention Credit (ERC) guidelines. In addition, many third-party promoters are pushing ineligible businesses to file. According to Acting IRS Commissioner Doug O'Donnell, "The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this."

The Employee Retention Credit provides much-needed relief for small businesses affected by COVID-19. Remember that you must meet certain criteria set forth by IRS guidelines in order to qualify for this benefit. Make sure you thoroughly review eligibility requirements before applying! With careful planning and accurate recordkeeping, small business owners can take advantage of this valuable program quickly and easily while still meeting their financial obligations during these tough times.