With taxes due in just three weeks, small businesses already have a lot on their plate. But employers shouldn't overlook a new opportunity to put
Businesses that had five to 500 employees in 2020 and 2021 may be eligible for the Employee Retention Tax Credit, or ERC, a refundable tax credit designed to reward employers for retaining workers during the pandemic. In fact, business owners could potentially receive up to $26,000 per employee. In order to qualify, employers must amend their 9-41 tax forms, or quarterly employer returns, within three years of 2020 and 2021. The final deadline to submit the first round of revised forms is April 15, 2024.
But qualifications could become restricted in the next year, so employers should submit revisions sooner than later, says Sarah Mahlof, a former public accountant and founder of ezGrants, a company that helps other businesses apply for federal grants. Still, ERC eligibility is not necessarily easy to understand at a quick glance — for employers and accountants alike.
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"There are over 100 different tax rules on this program," says Mahlof. "There is a lot of uncertainty unless you really know the qualifications. But right now, the qualifications are pretty open as to who could benefit."
For example, initially, businesses couldn't apply for both the paycheck protection program and the ERC. Better known as the PPP loan, the paycheck protection program helps small businesses pay compensation costs, interest on mortgages, rent and utilities. And while the PPP is taken into account when calculating how much a business can receive through the ERC, employers can now apply for both.
Mahlof underlines without this barrier of PPP loan eligibility, many more businesses could be eligible for the ERC. There are three ways to qualify: the business sustained a significant decline in revenue during 2020 or the first three quarters of 2021 compared to pre-pandemic 2019 revenue; the business sustained a full or partial suspension of operations due to state or local COVID-related mandates during 2020 or the first three quarters of 2021; or it qualifies as a recovery startup business — meaning this business launched on or after February 15, 2020, and grossed less than $1 million annually in 2020 and 2021. Only recovery startup businesses can qualify for the last quarter of 2021.
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Businesses have to prove they had one of these experiences, but not all three, notes Mahlof.
"Your revenue could have gone up during this period, and as long as you were impacted by a government mandate that changed the way you operate, you could still be eligible," she says. "For example, restaurant owners had to close their doors or limit indoor dining. But I know a lot of businesses where their outdoor space and takeout was booming."
The operational impact goes beyond a change in business hours or services offered, too. Mahlof also lists shutdowns of supply chains, an inability to visit a client's job site, additional spacing requirements for customers and employees due to social distancing rules and a reduction in employee workloads.
If business owners can prove their eligibility, then they can claim 70% of the wages paid to an employee in a given quarter, up to $10,000. For instance, accounting firm Alliant Group found that if an employee is paid the federal minimum wage of $7.25, their wages would equal approximately $3,480 a quarter, giving employers a maximum credit of $2,436 per employee.
Ultimately, unless the business opened its doors in 2020, it would only qualify for credit in the last three quarters of 2020 and the first three quarters of 2021. Still, that's six quarters' worth of potential tax credit. Mahlof encourages
"It's worth having a conversation and seeing if there's potentially a lot of money that could be gotten back for the company," says Mahlof. "At any point, the [government] could restrict the qualifications for the program, so definitely look into it sooner than later."
