E+ 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. The Fed’s pause in interest rate hikes will affect your money
How to shift bond portfolios as the Fed pauses interest rate increases0 The American Institute of CPAs’ director for tax policy and advocacy, Kristin Esposito, said that “ERC mills” have popped up. “
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.
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. He warned: “Do not submit this until the person helping you is willing to sign the amended return as the paid prepared.” “There are literally hundreds firms that I personally know that would sign and give credit to them.” “