While a lot of attention has been given to the recent renewal of the paycheck protection program, there are two tax credits included in last December’s Taxpayer Certainty and Disaster Tax Relief Act that may actually be more valuable for many small businesses. Why?
Because the PPP is a forgivable loan that’s only available to certain businesses, whereas the employee retention tax credit and the work opportunity tax credit are both potential cash payments that are available to a greater number of small businesses.
Interested? You should be. Because if your business is still in operation but has been at least partially affected by Covid, then you’re probably eligible.
To be eligible for the employee retention tax credit in the first or second quarter of 2021 you must first show that your business had fewer than 500 full-time-equivalent employees and was either partially or fully shut down due to Covid restrictions. Even if you don’t match the shutdown requirements you can still qualify by demonstrating that your revenues (defined as total sales, net of returns and allowances) declined in either quarter by more than 20% compared with the same quarter in 2019 (employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts).
That threshold is lower than what is required to access PPP funds, which requires showing a 25% reduction in revenues. Assuming you qualify, you may be surprised at just how much money you’ll save. So here’s how you will figure that out.
The first step will be to calculate the payroll taxes owed – like you usually do – for the quarter on your federal quarterly reporting form 941. You take 70% of each of your employees’ wages – whether they were working or furloughed and this includes health benefits – paid up to $10,000 that quarter. So the maximum credit for the first two quarters of 2021 is $7,000 per employee per quarter.
Now, go back to your form 941 and deduct – or credit – that amount against the Fica (the 6.2% social security tax) liability your company owes. Because this is a “refundable” tax credit if you owe less money than the amount of the credit you can get the money returned to you in cash. This is not a loan. There is no forgiveness. There’s no additional paperwork other than completing the federal form 941 which you, your payroll company or your accountant already does.
Can you still claim the credit and participate in the paycheck protection program? Sure. As long as the wages you’re using in the credit calculation are separate from the wages you’re using to calculate the PPP loan and its forgiveness. In other words, no double dipping.
The employee retention tax credit isn’t new. It began with the March 2020 Cares Act and employers can still go back and retroactively claim a credit for that year. But the bar to qualify is higher for 2020 and the amount of the credit is less. Thanks to the more recent stimulus bill, the requirements for the first two quarters have been loosened so it’s become easier and more lucrative.
Pretty great, right? Well, that’s not all. There’s another lucrative tax credit that every small business owner should know about. It’s called the work opportunity tax credit. This is also a refundable credit and was extended through 2025.
This credit is completely separate from the employee retention tax credit. That credit was for retaining employees. The work opportunity tax credit encourages you to hire employees. But not just any kind of employee. This credit is for small businesses who hire certain veterans, people off of welfare or out of prison and rehab and – most importantly – those that have been “long-term” unemployed. Long-term is defined as more than six months and we all know that this recession has created a lot of those kinds of workers.
If you hire someone that fits those criteria then you can get a refundable credit of anywhere between $1,200 and $9,600 (yes, $9,600) against the income taxes you owe this year. This credit is per employee so the amount may be even higher if you bring on additional people that qualify. If an employee is included for the work opportunity tax credit, their wages are not allowed to also be included for purposes of calculating the employee retention tax credit. Again, no double dipping.
Combined, both the employee retention and work opportunity tax credits can result in a big cash incentive for many small businesses, particularly for those that may not even qualify for another round of PPP. The only caveat I have is that calculating both credits isn’t easy or intuitive because, well, it’s the IRS, isn’t it? So you probably want to engage a professional accountant to help. But your returns for doing this should well exceed your costs – particularly the costs of leaving money on the table in a year when every dollar counts.
