Business

How a small enterprise claims billions in money refunds from the IRS

A business advertises employees after coronavirus disease (COVID-19) restrictions are lifted in Santa Monica, California on June 22, 2021.

Lucy Nicholson | Reuters

Small businesses across the country are struggling to retain and recruit new employees in a tight labor market that has given workers the upper hand. Friday’s latest non-farm payroll report showed the hiring remains hot, with better-than-expected 850,000 jobs added by employers in June and wages ticking higher again.

Companies are forced to offer their employees higher wages and benefits and to take advantage of a booming economy after Covid. And they compete locally with a number of large corporations in the U.S. who are raising wages and offering enticing bonuses. Amazon is offering a $ 1,000 sign-up bonus for some warehouse jobs; McDonald’s raised its minimum wage in May and is now offering $ 400 and $ 500 bonuses for certain positions; Chipotle offers an average hourly wage of $ 15 and a referral bonus of $ 200 for existing employees.

This talent war has been tough for small businesses still trying to recover from losses during the coronavirus pandemic. However, many have the right to get money back from the government by adding it to the income tax they paid. Small and medium-sized businesses can get cash direct from the federal government through the Employee Retention Credit (ERC), which reimburses businesses based on a percentage of the wages paid to their employees.

Many entrepreneurs are already taking advantage of the benefits. “This helps them offset wages, wage increases, and part of the wages for new hires they hire,” Paychex CEO Marty Mucci told Jim Cramer on CNBC’s Mad Money last Tuesday. “We have over $ 3 billion in processed tax credits, which is cash in your pocket to help you out immediately.”

However, many small businesses are unaware of this.

“One of the key programs that was largely unknown is the employee withholding tax credit,” said Sarah Crozier, spokeswoman for the Main Street Alliance, a small business advocacy group. “A lot of people think that a tax credit will be refunded later, but it is paid up front.”

This is how the tax credit works

The ERC started with the federal government’s first economic Covid bailout package and was recently expanded to allow companies to reclaim more money from the wages they paid their employees in 2020 and 2021. Businesses can receive cash for wages paid through the end of 2021 and retroactive payments for wages in 2020.

Eligible companies can claim back up to 70% of wages paid to employees up to $ 10,000 or a maximum of $ 7,000 per employee for each quarter of the calendar year. It adds up to a potential total of $ 28,000 in cashback per employee per year.

The Employee Loyalty Loan is aimed at small and medium-sized businesses as you currently need to have 500 employees or fewer to be eligible. Beyond the employee threshold, companies are currently facing a 20% decrease in gross income in a quarter of 2021 compared to the same quarter of 2019, closed by the government in the quarters for which they claim the ERC. The 2020 CARES Act legislation required gross earnings in a calendar quarter to be less than 50% of gross earnings compared to the same calendar quarter in 2019.

How do I make an IRS claim?

For an employer who has already paid taxes for 2020, the ERC can reduce its total liability and the retrospectively claimed money. To get ERC money back in the form of a tax refund, companies must complete a prepayment form or Form 7200 with the Treasury Department’s Internal Revenue System or process it through a payroll company such as Paychex.

“A lot of these companies have short cash flow runways, and it’s really important to get as much money now as you get refunded later in the year,” said Crozier.

The credit can be a cash refund up to a maximum of $ 7,000 per employee per quarter in 2021 (up to 50% credit in 2020 of a maximum of $ 10,000 per employee per year). Start-ups that were founded after February 15, 2020 and were forced to close can be granted a higher loan.

For an ongoing payroll period, it can reduce liability per employee and the amount of payroll taxes that would otherwise have been paid, including federal income tax, social security, and Medicare taxes.

The specific quarter that a company takes the credit for – companies typically pay wage taxes quarterly – makes a big difference, making 2020 the year more labor costs are likely to be eligible, said Tony Nitti, a partner with the Tax Services group at RubinBrown. That’s because business is doing much better in 2021 than it is in 2020, so the constraint on the 2019 gross revenue decline may no longer be met. Nitti said companies need to keep an eye on the requirements and focus on claiming the ERC money only for the quarters they qualify for.

How to count wages paid

Wages count towards this cashback incentive only if they are incurred on FICA tax, or U.S. salary tax, and wages paid to a business owner’s relatives are ineligible. Although money used to set bonuses to compete with companies like Amazon and McDonald’s can count as eligible wages for the ERC.

The first economic bailout package allowed companies on the paycheck protection program loans not to use the ERC, but now they can exclude the PPP loan, which is used to pay wages, and most importantly, no application for waiver of PPP loans. In fact, employers have a choice between applying for PPL loan waiver or ERC. If they ask for forgiveness and are rejected, they can still apply for the ERC afterwards. In addition, any wages not paid from PPP loan funds will still be eligible for the ERC.

More from CNBC’s Small Business Playbook

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