How a complicated tax credit could earn your small biz $26,000 per employee

Is your small business owed $26,000 from the U.S. government for every worker you employ?

That’s the pitch you’re probably getting in your inbox from services all around the country that claim that, because of the Employee Retention Tax Credit (ERTC), the money is owed to you.

“Some of these companies can be really aggressive, and some are taking advantage of people,” warned Kristen McCabe, a COVID relief program specialist with Brinker Simpson & Co. in Media. “They’re sending these notices that your company could be eligible for millions of dollars, and our clients keep calling us about it. You have to be careful.”

Michael Jamgochian, a certified public accountant based in West Chester, agreed. “For some of these firms, it’s been a money grab, and a lot of it is not legitimate.”

The abuse has caught the attention of the Internal Revenue Service, which warned businesses in October to “be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true.”

Although $26,000 per employee does sound too good to be true, and yes, there are fraudsters out there, the ERTC is a legitimate tax credit. And your business may be entitled to at least some of the money promised.

To see whether you’re eligible for the ERTC, you first have to determine whether your business was affected by the COVID pandemic in either 2020 or 2021. If you were fully or partially shut down during some of that period, or if your receipts in a calendar quarter — for most quarters — during those years fell significantly below the same quarter in 2019 (50% in 2020 and 20% in 2021), then you may be eligible. But be careful, because the determination isn’t cut and dry.

“If your operations were impacted in a more than nominal way compared to a pre-pandemic world, then you could potentially qualify,” McCabe said. “But the IRS doesn’t really tell you what more than nominal is.”

If you are eligible, then you can take a tax credit of up to $7,000 per employee for an affected quarter in 2021 or for up to $5,000 for an affected quarter in 2020. The $7,000 credit is available for three quarters in 2021. But the maximum credit you can take in 2020 is $5,000 so that’s where the total amount of $26,000 comes from.

With me so far?

The credit is taken against your company’s quarterly payroll taxes, and you still have time to claim it. According to the payroll service Paychex, which provides services to help claim the credit, your 2020 amended payroll tax returns from quarters 1, 2, and 3 are due by April 15, 2024, while your 2021 amended payroll tax returns for all quarters are due by April 15, 2025.

However, “you want to make sure that you’ve got enough time for the IRS to receive your return, for them to process it, for it to work through,” said Erin Lierheimer, a product manager at Paychex. “And heaven forbid you end up with a bump in the road, which unfortunately we do see on occasion, you want to have time to be able to go back and clean that up. Procrastination is not your friend here.”

As you’ve probably realized by now, the calculation is complicated. And, of course, there are plenty of limitations. For example, you can’t use the same payroll funds if you used them to get a forgivable loan under the popular Paycheck Protection Program. Owners’ wages are excluded from the ERTC calculation, the size of your business needs to be taken into consideration, and the definition of partially shut down is also debatable.

“In my opinion, the rules are so ambiguously written that it’s frustrating,” McCabe said. “For some of our clients, it’s confusing how to determine revenues lost if there are different product lines or they’re a seasonal business.”

Considering the size of the potential credit, I think that every small business should be investigating whether they’re qualified, particularly those in the restaurant and retail industries that — especially in Philadelphia — were significantly impacted by shutdowns and restrictions.

But it’s important to be careful how you approach the ERTC. You should consult with an accountant or law firm that has experience with calculating the credit or, better yet, reach out to a payroll company like ADP or Paychex that is offering these services to their clients and have the resources (and the credibility) to determine the proper amount owed to you.

Because it’s so niche, Jamgochian recommended working with a firm that’s experienced in calculating the ERTC. And also one that puts its money where its mouth is.

“Make sure the firm you’re using is clear about their payment arrangement, whether it’s a fixed fee or on contingency,” he said. “I prefer a contingency arrangement where the service provider doesn’t get paid unless you receive the credit, so there’s an incentive to make a legitimate effort.”

The ERTC could be a lucrative opportunity for businesses that are eligible. But not using a credible service to review and calculate the ERTC “could result in taxpayers being required to repay the credit along with penalties and interest,” the IRS warned.

Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.