Tax season is here—find out which tax credits can help your small business

The deadline to file 2020 tax returns is fast approaching, and we know many small business owners need to learn about what kind of tax benefits they might benefit from during this challenging time. 

Below you will find some important information about the new Employee Retention Tax Credit and the Work Opportunity Tax Credit. 

Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) encourages small business owners to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. 

To be eligible for ERTC, your business must have fewer than 500 full-time employees and you must prove it was partially or completely shut down due to COVID-19 restrictions. If your business was not shut down, you can still qualify for the tax credit by demonstrating that your revenue (defined as total sales, net of returns and allowances) declined in one quarter in 2020 by more than 20% compared to the same quarter in 2019.

If your business didn’t exist in 2019, you can use a corresponding quarter in 2020 to measure the decline in gross receipts.

To apply for the ERTC, you need to calculate the payroll taxes you owe 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. The maximum credit for the first two quarters of 2021 is $7,000 per employee per quarter.

Refer back to your Form 941 and deduct–or credit–that amount against the FICA (the 6.2% for social security tax) liability your company owes. If you owe less money than the amount of the credit, you can get the money returned to you in cash. 

For more information and guidance on ERTC, please click here.

NOTE: Under the CARES Act, businesses could either take a Paycheck Protection Program loan or claim ERTC, but not both. The December 2020 Relief Act retroactively removed this limitation and extended the ERTC through the first two quarters of 2021.

Work Opportunity Tax Credit

The Work Opportunity Tax Credit (WOTC) is a federal tax credit available to employers for hiring individuals from certain targeted groups who have consistently faced significant barriers to employment. Such individuals include certain veterans, returning citizens, the “long-term” unemployed, and certain individuals who have received federal assistance programs like the Supplemental Nutrition Assistance Program (SNAP). This credit is available to small businesses and was extended through 2025.

• Long-term is defined as more than six months and we know that this recession has created a lot of those kinds of workers.
• If small businesses hire someone that fits the criteria, they may receive a refundable credit of anywhere between $1,200 and $9,600 against the income taxes owed for 2020. This credit is available per employee, so the total amount for WOTC may be even higher if small businesses hire more workers that qualify the criteria.
• If an employee is included for WOTC, their wages are not allowed to also be included for purposes of calculating ERTC. 

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 have accessed the Paycheck Protection Program and other federal relief programs.

For more information and guidance on WOTC, please click here.

NOTE: On March 17, the Internal Revenue Service (IRS) postponed its filing deadline to May 17. However, self-employed individuals, sole proprietors and S-corporation shareholders must still make their estimated tax payments, which are due on April 15.