Government tax credits can be a lifeline for businesses navigating the impact of the COVID-19 pandemic. These credits can prove especially helpful for businesses struggling to retain a skilled workforce during periods of reduced demand. In the coming months, competition for skilled labor is expected to ramp up, so the smart strategy is to maintain your current team and add qualified labor now if you can.
There are two tax credits to consider.
The Employee Retention Tax Credit (ERTC) can enable employers to provide workers with full compensation, even when there is not enough work for them to be on the job full-time.
The Work Opportunity Tax Credit (WOTC) offers an incentive to employers for hiring workers who consistently face barriers to employment. The largest group of qualifying new hires are participants in the Supplemental Nutrition Assistance Program.
Businesses that take the time to complete the documentation required to claim these credits can reap significant benefits that could help them overcome setbacks suffered due to the pandemic.
What is the ERTC?
The ERTC is a refundable tax credit designed to encourage eligible employers impacted by COVID-19 to keep employees on payroll. It was originally enacted in March 2020 and was expanded at the end of last year.
Eligible employers can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees during the first two quarters of the year. In 2021, the credit is capped at $7,000 per employee per calendar quarter. That totals $14,000 per employee in 2021.
The American Rescue Plan Act of 2021 extends the ERTC to the end of 2021, making the potential credit per employee even greater, but as of the start of the second quarter, the IRS had yet to provide guidance on the provisions of the Act.
For employers with fewer than 500 employees, qualified wages are defined as all wages paid to employees, whether or not the employee provided services.
In the case of large employers, the ERTC applies only to those hours an employee is paid wages while “not providing services.” This would be during times when the business is suspended or because of a significant decline in gross receipts. Employers are allowed to use “any reasonable method” to determine the hours when an employee was not providing services. However, this is not meant to include employees working their normal hours who are less productive than they would normally be due to COVID-related disruptions.
Employee wages up to $10,000 are covered by the credit and if an employer’s employment tax deposits don’t cover the credit, IRS advance payments may be available.
Who Qualifies for this Tax Credit?
Employers that operate during January 1, 2021 through June 30, 2021 and experience either of these circumstances are eligible.
- Your business was fully or partially suspended due to orders from an appropriate government authority due to COVID-19.
- You had a significant decline in gross receipts during a calendar quarter in 2021 compared to the same calendar quarter in 2019 or 2020. Gross receipts in 2021 must be less than 80% of receipts in the same quarter in 2019, or less than 50% of the receipts in the same quarter in 2020.
Recipients of Paycheck Protection Program (PPP) loans are now eligible to participate, retroactive to March 27, 2020. PPP recipients cannot claim the credit with respect to wages paid with forgiven PPP funds.
According to the IRS, to claim the Employee Retention Credit, eligible employers should report total qualified wages and related health insurance costs for each quarter on their quarterly employment tax returns, beginning with the second quarter. The credit is taken against the employer’s share of Social Security tax but the excess is refundable under normal procedures.
In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act.
Eligible employers can also file a request for an advance of the ERTC.
Details on the forms that need to be submitted can be found on the IRS website. Businesses should seek tax advice from a qualified consultant who can make sure they have the latest information on tax obligations and requirements for claiming the ERTC.
What is the WOTC?
The WOTC is a federal tax credit available to employers for hiring employees from groups who otherwise would face barriers to employment.
Participating companies can earn a credit between $2,400 and $9,600 per new hire, depending on the worker category, hours worked and wages earned. This is a dollar-for-dollar credit, not a percentage of taxes owed. New hires must work at least 120 hours before the credit can be claimed.
Who Qualifies for this Tax Credit?
To qualify for the WOTC credit, employers must hire eligible employees from the following target groups:
- Qualified IV-A Recipient
- Qualified Veteran
- Designated Community Resident (DCR)
- Vocational Rehabilitation Referral
- Summer Youth Employee
- Supplemental Nutrition Assistance Program (SNAP) Recipient
- Supplemental Security Income (SSI) Recipient
- Long-Term Family Assistance Recipient
- Qualified Long-Term Unemployment Recipient
To claim the credit, employers must first certify the new hire is a member of a targeted qroup.
An eligible employer must file Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, with their state workforce agency within 28 days after the eligible worker begins work.
Taxable employers can then claim the tax credit as a general business credit against their income tax by filing the appropriate forms along with their business’s income tax return.
The IRS advises businesses to direct their questions to their state workforce agency.
Again, businesses should seek tax advice from a qualified consultant who can make sure they have the latest information on tax obligations and requirements for claiming the WOTC.
Arcoro Can Help
Arcoro’s partnership with Clarus Solutions can make navigating available tax credits easy. Clarus provides Work Opportunity Tax Credit software for companies that hire job seekers who face employment barriers. Through an integration with the Arcoro Onboarding module, Arcoro customers can use Clarus to easily identify and document WOTC-qualified candidates and new hires.
Get our helpful “Secrets to Onboarding” guide to learn more about successfully managing onboarding in today’s virtual environment.