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The COVID-related payroll tax refund you might be missing out on



Photo by Tim Douglas

In response to the pandemic and its enormous effect on small businesses, the federal government passed a number of relief bills. You’re likely familiar with PPP loans, created by the $2 trillion CARES Act. But did you know the CARES Act also created the Employee Retention Credit (ERC)?

If you’re a small or medium-sized business owner that kept your full-time or full-time equivalent W2 employees on payroll during COVID, you’re likely entitled to a payroll refund (the ERC). If you qualify, that means up to $26,000 per employee.

And unlike the Paycheck Protection Program (PPP) which ended in 2021, this opportunity is still available. Let’s dive into what this could mean for owners and employees.

What is it?

It’s known as the Employee Retention Credit (ERC), and if you haven’t heard of it, you’re not alone. While 70% to 80% of small and medium-sized businesses would qualify for the refund, many business owners and their accountants have no idea it exists, leaving huge amounts of business-changing money on the table.

The ERC gives qualifying businesses the chance to claim a substantial tax refund for every employee they kept on payroll throughout the last three quarters of 2020 and the first three quarters of 2021. 

Breaking down the numbers

For those who meet the qualifications, the ERC can be incredibly generous. Qualifying businesses are entitled to claim a $5,000 tax refund for every employee that worked for them during the last three quarters of the 2020 calendar year.

The benefit gets even larger for 2021. Qualifying businesses are entitled to claim a $21,000 tax refund for every employee that worked for them during the first three quarters of the 2021 calendar year.

This means your business might be owed a total of $26,000 for each and every employee who worked during this span of 18 months.

Qualifying criteria

The qualifications for the ERC are different for 2020 and 2021. To make sure your business takes full advantage of this benefit, it’s important to understand both sets of qualifications.

Your business will qualify for the 2020 refund if:

  • You had 100 or less employees on your payroll in 2019
  • You kept employees on your payroll in 2020
  • Your business was partially or fully shut down due to a government order in 2020
    OR
  • Your revenue fell by at least 50% or more during any quarter of 2020 compared to the same quarter of 2019

Your business will qualify for the 2021 refund if:

  • You had 500 or less employees on your payroll in 2019
  • You kept employees on your payroll in 2021
  • Your business was partially or fully shut down due to a government order in 2021
    OR
  • Your revenue fell by at least 20% or more during any of the first three quarters of 2021 compared to the same quarter of 2019

As you can see, the qualifications for 2021’s refund are more inclusive than 2020’s. In addition, the 2021 refund is significantly larger than the 2020 refund.

If you’re still not sure whether your small or medium-sized business meets either of these sets of qualifications, you can contact a professional ERC refund expert like Innovation Refunds to get answers for free.

Employees in cafe
Photo by Ketut Subiyanto

Common misconceptions

One of the reasons so many small and medium-sized businesses haven’t yet claimed their ERC refund (aside from a lack of awareness) is because they mistakenly believe they do not meet certain qualifications.

Check out some of these common misconceptions.

1. “My business had to have been closed at some point.”

Your business doesn’t have to have been completely closed to qualify. You may still qualify if your business:

  • Experienced travel restrictions
  • Was unable to hold necessary group meetings
  • Was unable to receive deliveries from suppliers
  • Had to reduce product or service offerings

2. “My business can’t claim an ERC refund if it received a PPP loan.”

According to the IRS, businesses that received a Small Business Interruption Loan under the Paycheck Protection Program (PPP) can still claim an ERC refund. The only caveat is that you can’t claim the ERC for any employee wages that were counted as payroll costs for getting your PPP loan forgiveness.

3. “I didn’t qualify for an ERC refund in 2020, so I won’t qualify in 2021.”

The qualifications for a 2021 ERC refund are more inclusive than 2020. Plus, the 2021 benefit is significantly larger.

How to claim your ERC refund

To claim the ERC, you’ll need to amend two years of forms that were previously submitted to the IRS—you can do this with form 941X. To properly fill out this form, you’ll need to report qualified wages for each quarter of 2020 and 2021 on your federal employment tax returns. You’ll also need to report any qualified sick leave and qualified family leave wages for which you are entitled to a credit under the Families First Coronavirus Response Act (FFCRA). 

Many small businesses prefer to get help with the claim process to ensure they’re following all rules and regulations—plus it will likely save you a significant amount of time. You can enlist the services of a professional tax refund expert that specializes in the Employee Retention Credit, like Innovation Refunds. Experts like this handle the qualification, paperwork, and filing process and only take their commission once you’ve been paid out.

The takeaway

The COVID-19 pandemic has been an extremely difficult challenge for us all. Small and medium-sized businesses like yours have borne the brunt of government-ordered lockdowns, supply chain disruptions, and skyrocketing inflation.

But with small businesses being the backbone of this country, the U.S. government wants to help. Programs like the Employee Retention Credit are still available, but they won’t be for long.


About the author

Howard Makler is the co-founder and CEO of Innovation Refunds, a team of world-class tax attorneys and CPAs who have helped more than 10,000 companies receive over $1 billion in cash refunds. Co-owned by 100+ banks, its value is derived from its extended network of enterprise partners, financial institutions, cutting-edge technology resources, and trusted advisors.

Professional ERC refund experts like Innovation Refunds make the fairly complicated process of making a claim simpler and more likely to be approved. Starting with a 12-minute qualification survey, its advanced software determines eligibility for the ERC refund. The team of experts then informs clients exactly what their business is entitled to with no upfront cost. From there, a business can elect to have Innovation Refunds submit all the necessary paperwork and handle any back and forth with the government. Once your refund is accepted and funds arrive to your business, Innovation Refunds takes a commission.

The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.

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