How Does the Payroll Tax Credit Filing Process Work?
December 26, 2022 | Last Updated on: January 27, 2023
December 26, 2022 | Last Updated on: January 27, 2023
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Payroll taxes are tax payments made to the government based on salaries and wages paid to direct employees. No payroll tax is required to be made by businesses for payments made to independent contractors or freelancers. Any business that has at least one paid employee is required to pay taxes on employee compensation. Payroll tax payments can be taken out of the employee’s salary by the employer and then turned over to the government or can be paid directly by the business owner.
Payroll taxes paid to the U.S. government are collected, monitored, and enforced by the IRS. There are three types of federal payroll taxes.
In addition to paying payroll taxes to the IRS, small business owners must also pay payroll taxes to the state taxing authority where their employees reside.
Some businesses may be required to pay income taxes and payroll taxes to their city or county government. Local payroll taxes are used to fund government projects.
Since there is no way to avoid paying federal taxes, it’s important to learn about available credits for businesses. Payroll tax credits save business owners money by reducing their total tax liability. The decrease in taxes comes when the employer’s share of social security taxes or Medicare taxes are lowered by the government.
Payroll tax credits are often confused with tax deductions. While deductions reduce the taxable income on a business’s income tax return, tax credits reduce the filer’s tax bill calculated during the return. Payroll tax credits can be nonrefundable, which means that the credit will lower the bill to the total amount owed. Refundable tax credits, on the other hand, will result in a refund to the business owner if the amount of the credit exceeds the business’s liability.
It is important for entrepreneurs to stay informed about what tax credits are available, especially since the federal government is constantly revisiting tax rates and laws. Even if you work with a tax professional, or CPA, to complete your payroll tax returns each year, learning about the latest tax credits can help business owners make more effective business decisions.
Also called the ERTC or ERC, the Employee Retention Credit provided small business owners with an opportunity to get a refund for continuing to pay full-time employees during the pandemic. The credits were issued as a part of the Coronavirus Aid, Relief, and Economic Security (CARES Act) and then extended and expanded through the American Rescue Plan Act and the Consolidated Appropriations Act of 2021. The availability of ERTC credits was stopped with the Infrastructure Investment and Jobs Act.
ERTC provides refundable credits which reduce the business owner’s tax bill up to 50% for qualifying employee wages paid between March 12, 2020, and January 20, 2022. Except for self-employed individuals, small businesses are eligible to use ERTC for their 2020 taxes if their business was partially or fully shut down during the pandemic and there was a decrease in gross receipts of at least 50%. To apply ERTC to the 2021 tax year, the business owner must prove that revenues were at least 80% lower than the same time period in 2019. Recovery startup businesses must claim the credit through the end of 2021.
To be eligible for the maximum credits, employers must comply with the ERTC aggregate rules, which resemble the nondiscrimination rules for retirement and savings plans. Qualified wages, as of January 1, 2021, for the Employee Retention Tax Credit include:
The FFCRA, a part of the Tax Relief Act of 2020 created during the COVID-19 pandemic, was created to help small businesses by reimbursing employers for the expenses of wages paid during time off related to Coronavirus. The FFCRA applies to employers that provided paid time off to employees under EPSLA or the Expanded FMLA.
Funded through the American Rescue Plan, the vaccine paid leave tax credit, provides incentives for companies that allow employees to take paid time off to get vaccinated for Coronavirus. The credit was added to the rescue plan by President Joe Biden to encourage Americans to get vaccinated. The credit provides small businesses with 500 or fewer employees to receive a maximum credit of $511 per day for every vaccinated employee.
The Work Opportunity Tax Credit (WOTC) provides employer credits to small businesses that hire individuals from groups of people that have traditionally faced obstacles finding long-term employment. The goals of the WOTC are to diversify the labor force and create more jobs in underserved communities. Eligibility requirements for this tax credit are that the employee belongs to one of the following categories:
Each business tax credit has specific instructions on how to claim the credit, but most are reported along with the payroll tax return. Taxpayers wishing to receive a tax credit for periods they’ve already filed and paid taxes for can file an amended return. To file or amend payroll taxes:
When claiming payroll tax credits, the taxpayer can choose to reduce employment tax deposits or request an advance payment of the refund. The ERTC, Vaccine paid leave tax credit, and FFCRA credits are all reported on IRS Form 941, which is already used for filing payroll tax returns. To take the WOTC, employers must file Form 8850 with a state agency within 28 days of hiring the eligible employee.
Is my business eligible for payroll if it is not structured as a corporation? Yes. Although the eligibility requirements vary for each tax credit, businesses organized as limited liability companies (LLC), Partnerships, S-corporations, and C-corporations can take advantage of payroll tax credits.
Can I use a paper check to pay my payroll taxes? No, the IRS requires employers to use their Electronic Federal Tax Payment System to file and pay payroll taxes. However, many payroll providers or CPAs take care of this on behalf of their clients.
If I have taken out a PPP loan, can I still take the ERTC for my business? Originally, under the CARES Act, business owners that had been approved for a refundable Paycheck Protection Program (PPP) loan were not eligible for ERTC. However, the amendment made by the Consolidated Appropriations Act made it possible for entrepreneurs to still receive the tax credits under ERTC.
I run a tax-exempt nonprofit organization with 113 employees on my payroll. Am I eligible for payroll tax credits? Yes. Nonprofits categorized as 501(c) organizations by the Internal Revenue Code are eligible for the Employee Retention Credit if they are otherwise eligible.
Making payroll tax payments is an essential part of managing a small business. Every business owner should stay informed about the current payroll tax credits so that they can reduce their tax liability as much as possible. Many of the most recent tax credits were implemented to help small businesses stay afloat as the country navigated unprecedented times during the pandemic. If you believe your business missed out on filing for some tax credits, it’s not too late to amend those returns or even receive an advance or business loan based on those future credits. Some entrepreneurs, like Mike Gavigan, were even able to receive cash upfront by taking out an ERTC loan with Biz2Credit.