Most businesses and non-profit organizations rely on their Accountants to do their taxes. Yet; when the Government institutes new tax credits, it does not take into consideration whether or not an Accountant would have the ability to obtain the new tax credit for Clients. The purpose of this article is to shed a light on who is eligible to receive this new employee tax credit dubbed the Employee Retention Tax Credit (ERTC). And, how to identify service providers that specialize in identifying those tax credits on a performance-based shared benefit basis, sometimes known as a contingency fee basis. Simply put, a vendor that is providing a contingency fee is only paid a portion of the retrospective (past) and prospective (future) cost savings if they are successful. The vendor takes all the risk because if they do not generate refunds for Clients in the form of receiving an actual refund check from the IRS, they are not paid any fee. This incentivizes the vendor to identify as many refunds as possible. More importantly, Accountants and Tax Attorneys, are not allowed by the IRS to enter into contingency fee contracts unless it is a matter arising out of a dispute appeal of an IRS tax return, IRS refund or penalty, or as most commonly occurs, any matter arising out of a dispute in the Internal Revenue Code of the IRS, which explains why Personal Injury Attorneys can charge a contingency fee of 33-40% to Clients. Now, let us look at who is eligible for this new Employee Tax Credit.
When the Government passed the Employee Retention Tax Credit (ERTC), with the purpose of helping businesses and non-profits alike, they did not do a good job of educating the Public about the purpose of their Legislation. That purpose was to provide economic support to any entity that was adversely impacted by the COVID pandemic. However, the name of the Legislation, the Employee Retention Tax Credit suggests that in order to qualify for the Tax Credit, you as an employer have to have kept your employees on the payroll during the pandemic. Yet; this has nothing to do with how eligibility of the ERTC is determined. Secondly, from the perspective of a non-profit organization, they are going to assume that they are all not eligible because non-profits do not pay any Government Taxes, right? Wrong! All non-profit organizations pay Government Payroll Taxes. In this case, non-profits that are not Governmental organizations themselves are eligible for the ERTC because they all pay Payroll Taxes. Third, eligibility for the ERTC, which leads to receiving an actual refund check from the IRS casts a wide net.
To qualify for ERTC, most businesses and non-profits that filed W-2s and Form 941 which reports Payroll Taxes with the IRS, not including Sole Proprietorships, can be deemed eligible to receive a refund check on their Payroll Taxes that they have already paid to the IRS if they meet either of the following criteria: 1) Were partially or fully impacted by the COVID pandemic by a Governmental Federal, State, or Local stay-at-home Order which shut down their business or limited their capacity of operations such as a restaurant that had to either limit its seating capacity or move its seating capacity outside. 2) Were directly or indirectly adversely impacted because of the supply chain interruption during the pandemic. For example, it was a national story when major Ports in the United States have dozens of Cargo vessels stranded for months off the Coast because of COVID screening backups. While this interruption in the supply chain directly affected those trucking companies that were going to haul the cargo on those ships to their final destination, think about the businesses themselves that did not have the material goods on those cargo ships to sell. Besides retailers, think about boat manufacturers in the United States who purchase the majority of their parts to make their boats from France. That is not obvious. 3) Most importantly, the ERTC allowed eligibility to include a downturn of 50% in the gross receipts of business in any quarter when comparing the gross receipts from 2019 to those of the pandemic year of 2020 provided, and/or a downturn of only 20% in gross receipts in any quarter for the first three (3) quarters of 2021 compared to 2019. To be eligible for the ERTC for 2020, only businesses or non-profits that averaged 100 full-time employees in 2019 (meaning employees working 30 hours or more per week) qualify. To be eligible for the ERTC for any quarter, only businesses and non-profits that averaged less than 500 full-time employees in 2019 qualify.
The refund amounts being issued to businesses and non-profits are staggering. The ERTC refund for businesses and non-profits that qualify for the ERC in 2020 is up to $5,000 per employee, per year. And, the ERTC refund for businesses that qualify for the ERTC for 2021 is up to $7,000 per employee, per quarter! Finally, the way ERC is structured, any business or non-profit who had a great 2019 year may be eligible, and may not know it.
Finally, there is a Startup Recovery program of the ERC that provides businesses that formed their Company after February 15, 2020, to receive up to $7,000 per employee for the 3rd and 4th quarters of 2021, capped at $50,000 per Quarter, if they did not qualify for ERC either by the partial or full interruption in their business or drop in gross receipts, etc. with under $1,000,000 in annual sales.
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