Even though 2020 sounds like it was eons ago, small businesses in food and beverage are still making the uphill battle back to normalcy. And while actual pandemic restrictions have been lifted, owners continue to struggle with the labor shortage, supply chain issues, and increasing prices all around on their cost of goods.
While tax credit programs offer some good news, confusion surrounding eligibility are at an all time high. And you’ve got a business to run!
So, here we’ve outlined 3 major tax credit opportunities for small businesses that you may be able to take advantage of. Keep reading to see if your business is eligible and next steps to take for each!
A HUGE thank you to Mel Smith at Perkins & Co. for providing her brilliant technical expertise to help inform bright futures for Arryved merchants. Reach out to Perkins & Co or your own tax accountant or CPA firm for assistance evaluating eligibility and claiming these credits.
1. Employee Retention Credit (ERC)
What Is ERC?
The ERC was designed to encourage business owners to keep employees on their payroll during the pandemic. It’s a provision of the CARES Act that offers eligible employers impacted by the COVID-19 pandemic a refundable tax credit up to $26,000 per employee.
Eligibility Requirements For ERC
Your small business is eligible if, when measuring on a quarter by quarter basis, you:
- Experienced a full or partial government-mandated shutdown or
- In 2020, experienced a 50% or more decrease in gross receipts compared to the same quarter in 2019
- In 2021, experienced a 20% or more decrease in gross receipts compared to the same quarter in 2019 (or 2020 if not in existence in 2019).
You’d qualify for that quarter and the next quarter automatically (with the exception of Q4 2021). It’s only available for Q1-Q3 of 2021 unless your business qualifies as a recovery startup business as defined by the IRS.
How To Calculate ERC
If your small business is eligible, here’s how you can calculate your expected credit.
In 2020, businesses can get a refundable credit for 50% of qualified wages, including certain health care expenses, up to $10,000 per employee per calendar year, or a maximum credit of $5,000 per employee for 2020.
So, if an employee had $15,000 in wages, only $10,000 of that is eligible for the credit. A refundable credit of 50% means a total credit of $5,000, which is the maximum amount for 2020.
For 2020 only, employees who are eligible to be included in the calculation depends on if your business had more or less than 100 average full time employees in 2019:
- If your business had more than an average of 100 full time employees during 2019, only wages paid to employees who were retained but not providing services qualify.
- If your business has an average of 100 employees or fewer, you can claim wages paid to all employees whether they were providing services or not.
In 2021, businesses can get a refundable credit for 70% of qualified wages, including certain health care expenses, up to $10,000 per employee per quarter for the first three quarters of 2021, or a maximum credit of $7,000 per employee per quarter.
Again, only those businesses who qualify as a recovery startup business as defined by the IRS are eligible for the Q4 2021 ERC.
Other Good-To-Knows About ERC
If You Received Paycheck Protection Program (PPP) Funds
Even if you received PPP funds and qualified for full forgiveness, you might still be able to capitalize on the ERC! But, just like at Thanksgiving with your in-laws, you can’t double dip: You can’t use the same wages that qualified you for PPP forgiveness and use them for ERC.
However, many businesses had wages and some health care costs that exceeded the amount required for PPP forgiveness. Those excess wages may still qualify to be used for ERC.
If You Employ Family Members
Wages paid to a related individual (children, siblings, parents, step-family, nieces/nephews, aunts/uncles or in-laws) and to anyone who owns more than 50% of your business do not qualify for ERC.
When You’re Ready To File
If you’re eligible, and didn’t claim the credit when you originally filed your quarterly return (Form 941) or you didn’t claim enough credit, you can amend quarter by quarter using Form 941-X to claim the credit for all quarters of 2020 and for most employers, the first three quarters of 2021.
If you’ve already filed your 2020 and 2021 income tax returns, you need to amend those returns if you’re wanting to claim ERC.
Again, it’s important to work with a qualified accountant or CPA who has experience filing ERC’s to determine eligibility and calculate the credit. This credit is refunded in cash!
2. Federal Insurance Contributions Act (FICA) Tips Credit
What Is The FICA Tip Credit?
The FICA Tips Credit is intended to incentivize employers to comply with tip reporting requirements and encourage employees to report all collected tips. Eligible food and beverage businesses can take a credit against their federal income tax equal to the amount of employment taxes (Social Security and Medicare) they paid on reported tips.
Reporting Requirement Of Tips
If an employee regularly and routinely receives tips of at least $30/month for providing, delivering, or serving food and beverages for consumption, there is a reporting requirement for both the employee and the employer.
Employee Reporting Requirement: Employees must report in writing to their employer all tips received during the month. This must be done by the 10th day of the following month.
Employer Reporting Requirement: Employers must treat those tips as part of the employee’s earnings and therefore pay and withhold the appropriate taxes:
- Social Security withholding of 6.2% paid by both the employee and employer (12.4% total)
- Medicare withholding of 1.45% paid by both the employee and the employer (2.9% total)
- Income tax withholding for Federal and State
What’s Considered A Tip
Of course, there’s some uncertainty over what is technically considered a tip. This is how the IRS defines a tip:
Tips: Gratuities received both directly and indirectly are considered tips. Direct tips are those received from customers made in cash or by debit or credit card transactions. Indirect tips include those received from other employees through tip pools or other sharing arrangements. Tips must be unrestricted and uninfluenced by the employer.
Not tips: Automatic gratuities and assessed service charges are not considered tips even if they go directly to the employees. The IRS labels those as services charges and they should be treated as any other taxable wage.
Eligibility Requirements For FICA Tips Credit
Employees must be compensated at least the federal minimum wage rate of $5.15 per hour. Compensation can include hourly wages, service charges, tips, and any other items that make up the employee’s W-2 wages.
However, any tips used to satisfy the minimum wage requirement must be excluded from the calculation of the FICA Tips Credit.
Employers who allow non-tipped employees, such as cooks and dishwashers, to participate in a tip pool are ineligible for the FICA Tip Credit, even if they meet the minimum wage requirement.
Please keep in mind that the designated minimum wage for tipped employees varies by state, and your state may be required to pay a higher minimum wage than the federal rate.
How To Calculate The FICA Tips Credit
Take the total reported tips (included in all employees’ annual W2) and multiply by the total employer paid portion of FICA taxes: 7.65%.
How To Report & Claim The FICA Tips Credit
Use Form 8846 to claim the FICA Tips Credit. The credit is added as a nonrefundable credit on the business’ income tax return and used to offset income tax or alternative minimum tax liabilities assessed.
If not used within the current taxable year, the FICA Tips Credit can be carried back one year, or forward for 20 years.
3. Work Opportunity Tax Credit (WOTC)
What Is WOTC?
The intention of this tax credit is to incentivize workplace diversity and facilitate access to jobs for workers. WOTC is available to employers who hire and employ individuals from certain targeted groups who have faced significant barriers to employment.
Eligibility Requirements For WOTC
WOTC eligibility is a twofer: The employed individuals you’re filing for must both be certified by a designated local agency—like a state workforce agency—as being a member of one of 10 targeted groups, and they must meet the worker eligibility requirements.
10 Targeted Groups:
- Qualified veterans;
- Individuals formerly incarcerated for, or previously convicted of, a felony (must be hired within a year of being convicted of a felony or within a year of being released from prison for a felony conviction);
- Individuals between the ages of 18-40 residing in an Empowerment Zone (EZ) or Rural Renewal County (RRC);
- Qualified summer youth employees (must be 16 or 17 years old on May 1, only perform services between May 1 and September 15, and reside in an empowerment zone)
- Qualified individuals who have a mental or physical disability, referred to an employer following completion of a rehabilitation plan or program;
- Individuals between the ages of 18-40, whose families are recipients of supplemental nutrition assistance (SNAP) under the Food and Nutrition Act of 2008;
- Individuals experiencing long-term unemployment for at least 27 consecutive weeks at the time of hiring and received unemployment compensation during some or all of the unemployed period;
- Qualified recipients of supplemental security income (SSI) benefits under Title XVI of the SSA;
- Qualified IV-A recipient [recipients of state assistance under part A of Title IV of the Social Security Act (SSA)]; and
- Qualified individuals whose families are recipients of state assistance under part A of Title IV of the SSA.
Worker Eligibility Requirements
The employee you file for also must meet the following requirements:
- Begin work on or before December 31, 2025;
- Be in their first year of employment; and
- Perform at least 120 hours of services for that employer.
How To Calculate WOTC
Calculating how much credit your small business is eligible to receive depends on the employees’ hours and wages.
- For workers who perform at least 400 hours of services, the WOTC is equal to 40% of up to $6,000 of wages, or a maximum credit of $2,400.
- For workers who perform less than 400 hours of services but at least 120 hours, the WOTC is equal to 25% of up to $6,000 of wages, or a maximum credit of $1,500.
- If hiring certain qualified veterans, the wage limit increases to $24,000 and a maximum credit of $9,600.
How To Claim WOTC
Step 1 To Claim WOTC
An employer must pre-screen and obtain certification from the appropriate Designated Local Agency (referred to as a State Workforce Agency or SWA) that their employee is a member of one of the ten targeted groups to claim the credit.
On or before the day that a job offer is made to a qualified individual, the employer and the job applicant must complete Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 calendar days from the new employee’s start date to submit Form 8850 to the designated SWA. Additional forms may be required by the DOL to obtain certification.
Step 2 To Claim WOTC
After the required certification is received, employers claim the credit as a general business credit on Form 3800 and apply it against their income tax on the business’s annual income tax return. (For example, Forms 1040 or 1040-SR, 1041, 1120, etc.)
In general, taxable employers may carry the current year’s unused WOTC back one year, and then forward 20 years.
We recommend working closely with your tax accountant, CPA, HR professional, or payroll professional to make sure all documentation is filed accurately and timely.
Please note the following WOTF limitations before filing:
- An employer cannot claim the WOTC for employees who are rehired.
- Wages used for ERC can’t also be used for WOTC, and vice versa.
- The credit is limited to the amount of business income tax liability or SS tax owed (but can be carried back one year and forward 20 years).
Hopefully, that clears up any eligibility confusion and you’ve identified a tax credit opportunity or two for your small business! Remember to consult with a tax professional regarding any questions that come up as you dig deeper.