What’s Going on with the Employee Retention Credit?

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The Infrastructure Investment and Jobs Act ended the employee retention credit three months early.

Key takeaways:

  • The ERC is a tax incentive created so that employers would retain more employees during the pandemic.
  • The credit was extended until the end of 2021, but the Infrastructure Investment and Jobs Act signed on November 15, 2021, ended the ERC early.
  • Wages paid after September 30, 2021, no longer qualify for the credit.
  • Businesses need to reevaluate payroll and may have to pay back any payroll taxes retained in anticipation of the credit for fourth-quarter wages.

The last couple of years brought several new laws that include changes to tax law and assistance programs for both individuals and employers. Running a business in this landscape demands paying close attention to what’s been passed, so you always stay compliant.

President Biden signed the Infrastructure Investment and Jobs Act into law on November 15, 2021. The legislation includes allocating funds to rebuild roads, bridges, water systems, and the internet, among other infrastructure priorities, and also aims to address climate change and transportation safety. In addition, the law eliminated the employee retention credit (ERC) for wages paid in Q4 of 2021. This means eligible employers get a lower credit for the year and may have to look back at payroll retroactively.

Here are the details of the ERC and what the new legislation means for businesses.

What is the ERC?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 first introduced the ERC as a form of relief during the COVID-19 pandemic. The subsequent Consolidated Appropriations Act of 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA) expanded eligibility requirements and extended the ERC for qualified wages employers paid workers through the end of 2021.

The ERC was implemented as an incentive for employers to retain workers, as record numbers of businesses had to pause or stop operations, and many people were laid off. Employers were now able to receive both a Paycheck Protection Program (PPP) loan and the ERC, though they couldn’t pay qualified wages with funds from the PPP loan.

In 2020, the refundable credit was 50% of up to $10,000 in qualified wages paid per employee, with a maximum credit of $5,000 per employee for the year. 

In 2021, the credit was raised to 70% of qualified wages up to $10,000 paid per employee, and the maximum credit was increased to $7,000 per employee per quarter—reaching a max of $28,000 for the whole year. 

Eligible employers can claim the ERC retroactively to March 27, 2020, using Form 941-X, Amended Quarterly Payroll Tax Return, within three years after the initial return filing date. 

To qualify, businesses: 

  • Must have been partially or fully closed because of government pandemic restrictions; or …
  • Gross receipts were 50% less for the same quarter in 2019 for the 2020 credit and 20% less for 2021. If a business wasn’t operating in 2019, it could compare its gross receipts to the same quarter in 2020.

The CAA 2021 changes also opened up the credit to public colleges and universities, medical or hospital care organizations, and Congress-chartered organizations.

What are qualified wages?

There are different qualifying wage requirements for the last two years. For 2020, employers with 100 employees or fewer can claim wages for all employees, whether or not they are working. If there are more than 100 full-time workers, only wages for retained employees who aren’t working can be claimed. For 2021, these thresholds were increased to 500 full-time employees. 

However, note that the ERC can apply to full-time, part-time, seasonal, or other bases, as long as the employer meets the necessary qualifications.

What changed under the Infrastructure Investment and Jobs Act?

With the elimination of the ERC under the Infrastructure Investment and Jobs Act, any wages paid by an employer to employees after September 30, 2021, are not eligible. So, the ERC was essentially ended three months early. This means that the maximum credit per employee is $21,000 in 2021 or $7,000 per quarter for Q1 through Q3. 

There is an exception: if your business is a recovery startup, you may still be able to take the ERC for the last quarter of 2021. These businesses started operating after February 15, 2020, and have less than $1 million in average annual gross receipts for the prior three-year tax period.

What do the changes mean for employers?

This change may cause some confusion for employers, especially since the bill was signed in November and ends the ERC retroactively, beginning October 1, 2021. Business owners should ensure that they coordinate with payroll and make any necessary changes to Form 941. It’s possible that businesses will have to repay any payroll taxes retained to anticipate the credit.

It’s also important to plan for that $7,000 reduction in the credit per employee for the year, as the maximum credit per worker went from $28,000 to $21,000. This could hit some employers pretty hard.

Turn to Provident CPA & Business Advisors with questions

If the elimination of the ERC impacts you, it’s a good idea to meet with a tax professional who can guide you forward. You never want to miss any essential rule changes that could cost your business, now or in the future. 

Get in touch with Provident CPA & Business Advisors to talk to a tax expert about your obligations and options. 

How Do I Amend a Business Tax Return?

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You may need to file a tax return amendment for a business if there is a mistake on the original that impacts what you owe or there is new applicable information.

Key takeaways:

  • The IRS allows taxpayers to submit amended tax returns to correct an error that impacts the taxes owed or update relevant info.
  • Steps for filing:
    1. Find the correct form to use, which will vary based on the business type.
    2. Gather and fill out all relevant information.
    3. Send the form to the right place!

Tax mistakes happen all the time, and it’s common for business owners to need to make changes down the road. You may have made an error on a business tax return or have new information to include after the fact, and you can file an amended return when necessary. Sometimes, doing this may result in a change in tax liability.

The IRS has some fact-checking mechanisms in place and can catch many mistakes on a return. The agency may then reach out and notify a taxpayer of the issue and next steps, including how to file an amended return.

Here is a walk-through of amended tax returns and how to file them as a business owner:

What is an amended tax return?

While you can’t change any details on an original income tax return once it’s filed, you can submit a tax return amendment afterward if a change must be made. The only exception to changing the originally filed return is if it was rejected, and you must address an issue to resend it.

Whether you missed out on a tax break that you want to claim later or the tax return had a mistake, you can submit the appropriate form to amend. Taxpayers have three years from the date of the original return filing date, including extensions, or two years after the date they paid taxes, whichever is later. Note that the original filing date is considered the due date for that tax year, so filing early won’t impact it.

Amending a return may result in a higher or lower tax liability, so business owners should be prepared to pay a larger amount or get a credit, if applicable.

When to file an amended business tax return

You will be required to file an amended return if you made an error that will impact the tax you owe, you have new information that must be included, or the following business information changes:

  • Income
  • Deductions
  • Tax credits
  • Refund amount
  • Dependent information, if an individual return

When you don’t need to submit a tax return amendment

If there are mathematical errors on your tax return that you missed, or you forgot to include a tax form that should have been submitted, you likely don’t need to file an amended return. In both cases, the IRS usually steps in. In the event of an error, they should correct it or request a correction. And if you missed a form, they’ll mail it to you.

Steps for amending a tax return

So, how do you go about filing an amended tax return? Follow these three steps for a smooth process:

1. Find the right form to use

The IRS form you submit will depend on the type of business. Here is an overview of each:

  • Form 1040-X, Amended U.S. Individual Income Tax Return: This form is used by individuals, sole proprietors, and single-member LLCs.
  • Form 1065, U.S. Return of Partnership Income: Partnerships and multiple-member LLCs will send an amended Form 1065 and check the Amended Return box on Line G.
  • Form 1120S, U.S. Income Tax Return for an S Corporation: S corporations need to file an amended Form 1120S and check Amended Return on Line H.
  • Form 1120X, Amended U.S. Corporation Income Tax Return: C corporations will use Form 1120X to file an amended return and include any new applicable information.

Ensure you’re always using the most recent version of the appropriate form.

2. Gather your information

You’ll need a few things to amend your return. Aside from the IRS form, gather the return you’re amending, all forms, schedules, and worksheets submitted with it, and any notices from the IRS alerting you that adjustments are needed.

3. Send the form to the right place

If filing Form 1040X, send it to the address that appeared in the IRS notice or to the address provided in the form instructions. For Forms 1120S and 1120X, send the amended return to the same address where you filed the original return. Corporations can also file online using the IRS’s electronic filing system. Partnerships can mail their amended return to the indicated office per location on the Form 1065 instructions document.

Always make sure everything included on the amended tax return is accurate and up to date so that there are no further issues.

Are there implications of filing an amended return?

There are just a few considerations for business owners who need to amend their tax returns. If you made a mistake on your original tax return that led to owing more tax, you may be subject to more penalties or interest accrual—so it’s better to file an amended return as soon as possible. 

Some taxpayers worry that filing an amended return will prompt the IRS to look a bit closer at the business tax return. But that likely isn’t the case, especially if you submit everything as soon as you can and ensure accuracy and honesty. The IRS won’t proceed with a tax audit just because someone filed an amended return.

Get your questions answered by tax experts

Filing an amended tax return may seem daunting if you’ve never done it before. The Provident CPA and Business Advisors team can help assess your specific situation and take the right steps toward resolution. 

Contact us today to set up a consultation.

The Biggest Business Tax Impacts of COVID-19

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The government responded to the pandemic with assistance programs, many of which impact taxes for businesses. Here is an overview of some of the major changes.

Key takeaways:

  • The COVID-19 pandemic introduced major tax overhauls and assistance programs, including the Child Tax Credit, the Paycheck Protection Program, crisis recovery loans, and employer tax credits.
  • After any crisis, tax policy is reevaluated, and the continuing pandemic could mean more changes are coming.

Since early 2020, the government has rolled out numerous tax changes to help support Americans during tough economic times. It’s estimated that hundreds of thousands of US businesses had to close because of COVID-19, and we’re still feeling the impacts of economic uncertainty as the pandemic continues into 2022.

Let’s walk through the biggest tax revisions that came about because of COVID-19 for individuals and businesses and how economic volatility may cause a reevaluation of tax policy.

The Child Tax Credit

The American Rescue Plan (ARP) expanded the Child Tax Credit, increasing it to a maximum of $2,000 to $3,600 for children five and under and $3,000 for children ages six to 17. It is now available to households with little or no income and is fully refundable under the ARP. Families can now receive up to half of their credit in advance in the last half of 2021.

Families can take the maximum credit if they have a modified adjusted gross income of $75,000 or less for single filers, $112,500 or less for heads of household, and $150,000 or less for joint filers and widows or widowers who qualify. The maximum amount of the credit is reduced by $50 for every $1,000 over the income thresholds.

The ARP created the largest Child Tax Credit ever available to provide families financial help during the pandemic. Right now, these changes only apply to 2021, but the current administration has expressed interest in extending them into 2022.

The Payment Protection Program

The Payment Protection Program (PPP) was created as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. This program provided loan assistance to small businesses to encourage them to keep employees on the payroll. Funds could be used to cover payroll costs in addition to some operational expenses related to COVID-19.

The first-draw PPP loans were provided in 2020, and they could cover up to 2.5 times monthly payroll expenses with a maximum of $10 million. Second-draw loans have a maximum of $2 million. Loan funds are fully forgivable as long as a business uses the money for qualifying expenses.

In 2021, the ARP added $7.25 billion to the PPP, and that round of the program ended on May 31, 2021. However, current borrowers can still apply for loan forgiveness.

According to the Small Business Administration (SBA), there have been 11,453,936 PPP loans distributed and 9,087,832 forgiveness applications in 2020 and 2021. The program has paid out a total of $791,420,024,727. Millions of businesses have been able to stay afloat because of the PPP, but it is not clear if there will be any additional relief approved for the program in the future.

Business expenses that qualified businesses for PPP loan forgiveness are tax-deductible, and forgiven PPP loans aren’t considered taxable income. Eligible employers can also defer payroll taxes, even after loan forgiveness, but half of those deferred taxes from 2020 have to be paid by the end of 2021, and the other half by the end of 2022.

Economic Injury Disaster Loans

The SBA also started providing Economic Injury Disaster Loans (EIDL) in response to the pandemic. These funds must be repaid but are low interest, fixed-rate 30-year loans. Funds can be used for operating expenses or to repay debt.

The max EIDL amount is $2 million, and payments are deferred for the first two years, though interest still accrues. Eligible businesses could apply for a loan until December 31, 2021.

The SBA reports that $308,540,747,105 in EIDL dollars and over 3.8 million applications have been approved.

This loan is not considered taxable income, so businesses don’t have to worry about a significant tax impact. They can typically also deduct loan interest on their taxes. 

Family and sick leave tax credits

COVID-19 also spurred additional tax credits for employers granting family and sick leave. If an employee can’t work because they’re ill with the coronavirus, they are entitled to 10 days of paid sick leave at their regular pay rate. Employees can also care for someone who gets sick or a child because of a school closure—up to two weeks at two-thirds their regular pay rate. The IRS says that up to 10 weeks of qualifying paid leave can be counted towards the family leave credit.

Eligible employers can receive a credit in the amount of the sick and family leave provided, in addition to any health insurance plan expenses and the employer’s Medicare share on the leave. Organizations could originally take a credit for the period of April 1, 2020, to December 31, 2020, and the credit is refundable and applied to employment taxes. Employers can request an advance of these credits as well.

The ARP then allowed eligible employers to take these credits for sick and family leave from April 1, 2021 through September 30, 2021.

Looking to the future

The government provided many tax breaks and incentives to help businesses and individuals during COVID-19. Some provisions have expired, but many have allowed people to stay afloat. Tax policy is often reevaluated in any global or financial crisis as priorities shift to meet the moment. 

The IRS experienced significant delays because of the pandemic, and deadlines were pushed back to help people prepare. It is unclear if those trends will continue into 2022 or whether some of these game-changing provisions will be extended with additional government relief packages.

As the Organization for Economic Co-operation and Development (OECD) states in a report, “The COVID-19 crisis has caused a significant deterioration in public finances, which calls for a rethink of tax and spending policies once the recovery is well underway.” The pandemic revealed many economic problems for countries around the globe, and many of those issues could be dealt with in new ways. 

Further, a Brookings Institution article states that the pandemic is an opportunity to renew the “social contract” and may mean that citizens will become more willing to pay taxes to improve government assistance. However, whether this conclusion or economic volatility will spur broader changes to the tax code in a fiercely divided Congress remains uncertain.

Questions about taxes during COVID-19?

Tax law changes frequently, and it’s not easy to know what tax breaks you qualify for and if you have to follow new requirements as a business owner. The Provident CPA and Business Advisors team is here to help. Reach out to us today to get assistance with tax minimization or business planning strategies.

A Guide to IRS Form 1099 — Non-Employment Income

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Form 1099 is used to report non-employment income, like interest and contract work compensation. Learn more about the different types of income and who uses this form.

Key takeaways:

  • There are many types of income you must report to the IRS outside of employment income, including interest, dividends, real estate sales, retirement payouts, and contract payments.
  • Form 1099 is used to report this income to the IRS.
  • Common 1099s include 1099-INT, 1099-MISC, 1099-NEC, and 1099-R.
  • 1099 income must be included on tax returns.

Taxpayers may bring in income from several sources throughout the year aside from a regular employer—if they have one. An individual will likely receive IRS Form 1099 from whoever paid them, whether that’s a financial institution or a freelance client.

If you’re a business owner wondering if you need to file this form or a contractor who may receive one from a company, it’s important to understand the different types of income these forms are used for. There are several types of 1099s depending on what kind of compensation is being paid.

Here’s a look at what form 1099 is, different types of income, and an overview of the most common 1099s you may receive or have to file.

What is Form 1099 used for?

IRS Form 1099 reports income that is considered non-employment income. Taxpayers who receive compensation outside of their W-2 tax form, which employers distribute to summarize earnings and withholdings, usually receive a 1099 of some kind that lists what they earned from sources like contract work and investments.

In fact, there are many different types of income outside of employment income. Common examples are:

  • Dividends
  • Freelance and independent contract compensation
  • Interest
  • Unemployment benefits
  • Retirement plan payouts
  • Sales of stocks and other securities
  • Real estate sales
  • Prizes or awards

Whoever provided the compensation, whether a bank or a business, typically files the form with the IRS, and it’s up to the taxpayer receiving any income that applies to report it on their annual tax return.

Most common types of 1099s

There are actually numerous 1099s, each of which is based on the income type. Here are the most common forms you will likely come across:

  • 1099-B, Proceeds from Broker and Barter Exchange Transactions: This 1099 is filed by a broker if you sell stock.
  • 1099-DIV, Dividends and Distributions: Financial institutions file 1099-DIV if you receive dividends or other investment distributions over $10.
  • 1099-G, Certain Government Payments: Taxpayers receiving unemployment, grants, or tax refunds may get this form.
  • 1099-INT, Interest Income: If you receive over $10 in interest in your bank accounts, your institution will have to file this form.
  • 1099-K, Merchant Card and Third Party Network Payments: This 1099 is used by business owners if payments were received from payment card transactions and/or payments in settlement of third-party payment network transactions. It’s only issued if there were over $20,000 in payments and there were more than 200 of them.
  • 1099-MISC, Miscellaneous Income: Income of at least $600 made in rent, from certain contracts, to an attorney, and other sources must be reported on the 1099-MISC.
  • 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.: Any distributions from a retirement plan are reported on this 1099.
  • 1099-S, Proceeds from Real Estate Transactions: Income received from a sale or exchange of real estate is reported here.
  • 1099-NEC, Nonemployee Compensation: Since 2020, businesses must use this form to report non-employee compensation instead of the 1099-MISC. The 1099-NEC must be filed if a company pays a non-employee $600 or more in the applicable tax year. This is now the form that an independent contractor will receive.

There are many different uses for the 1099. The important thing to remember is that if you paid someone at least $600 in a tax year who isn’t your employee, you’ll likely have to file a 1099. If you are a freelancer or contractor and received payments of $600 or more, you should receive a 1099 from whoever paid you to include with your tax return. Any income you receive from your investments also must be reported via a 1099.  

Make sure to keep good tax records throughout the year to verify that all 1099 information is up to date and accurate. Otherwise, there could be issues and discrepancies with the IRS. Every 1099 you receive must be reported on your tax return. 

Also, remember that any income you receive from the same party that is at least $600 or interest payments over $10 needs to be reported to the IRS, even if the payer doesn’t file or send a Form 1099 by the deadline. Payers usually need to mail 1099s by January 31.

Where to get your tax form questions answered

Tax time can be stressful for any business owner. When you need assistance knowing which tax forms you need to file or how to report all income, work with a tax expert who knows the guidelines you must follow.

The team at Provident CPA and Business Advisors is here to help. We provide tax-minimization services, so you’re never paying more than you are legally required. We also help business owners with growth and profit improvement services through proactive management systems. 

Contact Provident CPA and Business Advisors today to learn more.