Okay, you’ve already heard at least a little bit about employee retention tax credits. These credits, part of the COVID-19 relief provided by Congress, give employers up to $33,000 of tax credit refunds per employee.
But the rules? Complicated from the beginning. And fluid. Lots of changes in how the credits work.
In this blog post, therefore, I want to identify the three basic ways in which professionals who own their own practice can qualify for and claim these credits. I’m mostly going to use healthcare professionals in the examples that follow. But the tactics and tricks described work for any self-employed professional or small business owner. Law firm partnerships. CPA firms. Consultants. You get the idea.
Three Notes to Start
Three quick notes to start: First, these tax credit refunds connect to non-owner and non-owner-family employee wages paid in the last three quarters of 2020 and then usually for the first three quarters of 2021. Some employers also get tax credit refunds for the fourth quarter of 2021.
Second, the credit formula gives a per-employee refund equal to as much as 50 percent of the first $10,000 in wages paid in 2020 and as much as 70 percent of the first $10,000 in wages paid in a quarter in 2021.
A third point: This blog post talks about how the rules work for small employers. Small means 100 or fewer employees in 2020 and 500 or fewer employees in 2021. Different rules apply to large employers.
And now let’s talk about the ways you or the professional services firm you own may qualify.
Quarterly Revenues Sagged
The standard and most straightforward way to qualify for the credits? Compared to 2019 revenues, your firm’s revenue sagged some quarter by more than fifty percent in 2020 or by more than 20 percent in 2021.
Suffer the specified quarterly decline, and you usually get tax credit refunds.
Example: A group medical practice saw quarterly revenues drop from its typical $1,000,000 a quarter to $750,000 a quarter in 2021. That 25 percent drop qualifies the practice for employee retention tax credits. If the practice employs ten workers who each make $20,000 a quarter, credits equal 70 percent of the first $10,000 in wages paid each of the ten workers. That probably means a $70,000 tax credit for the first three quarters of 2021. So, $210,000 in total.
By the way? If you should have gotten credits but didn’t, that oversight may connect to your Paycheck Protection Program loan. Initially, the rules said you could not get employee retention tax credits if you borrowed and then received forgiveness for a PPP loan.
The rules later changed, however, and said only that you could not get tax credit refunds for wages paid with PPP funds.
Government Orders Suspend All or Portion of Operation
Probably the easiest way to qualify for most employers? Getting hit by a government order that shut down either the entire operation or some part of it.
Specifically, if a state or local government order suspended more than a nominal part of your operation? You qualify.
And two quick clarifications: First, the “more than nominal” standard means at least a ten percent drop in your revenues or in the hours people work.
Second, a government order that impacts your own operation qualifies your firm. But so does a government order that impacts a vendor or supplier you rely on.
An example illustrates how this works even for an essential professional service.
Example: A orthopedic surgery practice finds itself subjected to a state order which prohibits elective surgery from May 15, 2020 through August 15, 2020. That order triggers a ten percent reduction in revenues while it’s in effect. This surgical practice therefore qualifies for tax credits on wages paid during the last half of the second quarter and the first half of the third quarter. If the practice employs ten workers who each make $20,000 a quarter, probably credits equal 70 percent of $10,000 in wages paid each of the ten workers in both quarters. So, a $70,000 tax credit for the second quarter and again for the third quarter. Or $140,000 in total.
And another example to show how easily government orders trigger eligibility.
Example: A law firm found itself impacted more than nominally by a county health order that closed courtrooms during the last two quarters of 2020. The firm qualifies for employee retention tax credits for both quarters. If the firm employed five employees who each made at least $10,000 during that government order? The employee retention tax credits should equal 50 percent of the first $10,000 in wages paid each employee, or $5,000 per employee. In total, that means $25,000 of tax credits for 2020.
Your Business Operation Bigger than You Think
A subtle thing to note about all this: Tax law combines the businesses a taxpayer owns using the same principles as apply to pensions. This aggregation can produce surprising results, as another example shows.
Example: A physician’s professional practice employs 15 high wage employees. He also owns a winery that employs three modest wage employees. A government order shuts down the winery. Because the winery represents more than ten percent of the physician’s businesses’ operation in terms of hours worked, however, he can claim the $7,000 per employee per quarter credit on all 18 employees—or $126,000 per quarter.
New Business or Rental Investment
Some small business owners enjoy a third way to qualify for employee retention tax credits in the third and fourth quarter of 2021.
If the employer averages $1,000,000 or less of revenue for the three years prior to 2021, starting a new trade or business sometime after February 15, 2020 and before 2021 ends qualifies the business owner for tax credit refunds.
Note: You need to start the new business before the quarter ends to get the credit for the quarter.
But this special version of the employee retention tax credit—called the recovery startup business employee retention credit—provides a credit of up to $50,000 a quarter.
A final example illustrates how this credit works.
Example: A dentist operates a small dental practice with $1,000,000 of average annual revenues. She also bought a rental property in late 2020. That rental property probably counts as a new trade or business and means she gets to take the employee retention tax credit for the third and fourth quarter of 2021 on her dental practice wages. If the practice employs five workers who each make $20,000 a quarter, probably credits equal 70 percent of first $10,000 in wages paid each employee. So, a $35,000 tax credit for each quarter or $70,000 in total.
If You Missed Employee Retention Tax Credit Refunds?
If you missed refunds you’re entitled to? Or maybe you did? Not a problem. Only a minor headache.
Confer with your tax accountant. See if she or he can help. Probably they can. (You need to amend your payroll tax and income tax returns to get the credits.)
And if they can’t help, consider talking with other tax accountants who have developed specialty practices in this area. Many CPA firms, including ours, did learn the ins and outs of the law. (We’d be delighted to help you. Contact us here.)
The one awkward warning I’ll share: My opinion is you should avoid the self-proclaimed employee retention credit consultants.
At least one of the larger firms providing this service appears to be subject to an FBI and Department of Justice investigation due to other tax credit and deduction work they’ve done. That’s scary.
And other firms whose work product we’ve learned about in various ways have often been extremely, extremely, extremely aggressive about the tax positions they take on the refund claims. I personally believe many of these refund claims won’t withstand scrutiny by the Internal Revenue Service.
Other Resources
This recent blog post at our CPA firm website provides a fuller description of the precise ways employers qualify for employee retention tax credits: 16 Ways of Qualifying for Employee Retention Credits.
If you want or need a lot more detailed information? Grab our paperback book: Maximizing Employee Retenion Credits.
And for readers who really want to dig into the details, three IRS notices provide most of the guidance one wants to know: IRS Notice 2021-20, IRS Notice 2021-23 and IRS Notice 2021-49.