Many businesses have a difficult time complying with IRS regulations because their industry is so specialized. If your company makes products for sale through retailers, for example, you might not be familiar with what the tax implications are of selling products below cost.
A commonly overlooked regulation is IRS Publication 521, Employee Benefits (and the Supplemental Schedules of Interest and Payroll Expenses). Section 602 of this publication defines exactly what a “nominal for purposes of the employee retention tax credit” is. You can use this definition to calculate the employee retention tax credit from your tax return for the 2022 tax year.
The Employee Retention Tax Credit
The IRS defines the nominal for purposes of the employee retention tax credit as follows:
- Nominal for purposes of the employee retention tax credit is the price of a qualified employee benefit per $1,000 of qualified compensation (per employee or per qualified spouse or dependent parent) in the taxable year.
- Nominal for purposes of the employee retention tax credit is the quantity of qualified employee benefit per qualified compensation (per employee or per qualified spouse or dependent parent) in the taxable year.
- Nominal for purposes of the employee retention tax credit is the amount of qualified benefit per qualified compensation (per employee or per qualified spouse or dependent parent) in the taxable year.
- Nominal for purposes of the employee retention tax credit is the amount of qualified benefit divided by the employee’s qualified compensation (per employee or per qualified spouse or dependent parent) in the taxable year.
- Nominal for purposes of the employee retention tax credit is the sum of the dollar amount of qualified benefit for each qualified beneficiary who was a qualified employee at any point during the taxable year, multiplied by the employee’s qualified compensation (per employee or per qualified spouse or dependent parent) in the taxable year, multiplied by the employee’s qualified compensation (per employee or per qualified spouse or dependent parent) for the taxable year (for example, if the employee had the same qualified family members during the year, the qualified family members would be part of the same employee for purposes of determining the employee’s qualified compensation).
The above example, which I found on IRS.gov, may be a bit confusing, so let’s look at how an employee might use the nominal for purposes of the employee retention tax credit to determine what his or her tax filing situation would look like.
Employer Deduction
Employers claim the employee retention tax credit on the form a-1099-INT, Form 1040. The form a-1099-INT includes the taxpayer’s adjusted gross income (AGI) and other income for the year, and the tax credit can be claimed on Form 1040. The nominal for purposes of the employee retention tax credit is multiplied by the difference between the income for the year ($3,000) and the nominal for purposes of the employee retention tax credit ($4,000) and then the employee’s income is subtracted from the total income to arrive at the employee’s taxable income.
Deferred Seller Depreciation Credit
While not as commonly used as the employee retention tax credit, if you have products manufactured or purchased by the employer (or the employer makes a purchase for you) that qualify for the seller depreciation credit, you can also use the nominal for purposes of the seller depreciation credit on your Form 1040 to calculate the employee retention tax credit. If you own the equipment, you may deduct the property’s fair market value. If the employer does not purchase or have you purchase the equipment, you can deduct the fair market value of the equipment as of the date you took possession of the equipment.
“Since the equipment is depreciated over the anticipated useful life of the equipment, the deferred seller depreciation credit is subtracted from the total deferred seller depreciation credit to determine the amount of the employee retention tax credit for each qualifying property in the taxable year,” said Stan Veuger, senior economist at the Economic Policy Institute.
Instead of claiming the employee retention tax credit and deferred seller depreciation credit on the front of your Form 1040, you can complete the total return, then complete another schedule (e.g., Schedule C) that includes them on a separate schedule.
Penalties
While the employee retention tax credit is a potential tax savings, make sure you have paid federal tax on your qualified business income for the year and that your employment situation meets the IRS’s requirements for the credit. For example, you can’t claim the credit if you made a K-1 on which you overstated your income, claimed credits for your parents or another dependent on your tax return and did not pay employment taxes on the income. The IRS also says that you can’t claim the credit if you claimed an exemption on your tax return. In other words, if you didn’t pay any tax on your income, you can’t claim the credit.
The tax reform law slightly changed the tax treatment of the employee retention tax credit. The new law lowered the lifetime limit for the credit from $1 million to $1 million and removed personal exemptions. Additionally, while the new law increased the number of wage-earners eligible for the credit from 20 percent to more than 40 percent, it lowered the maximum deduction per qualified employee. For these reasons, many tax experts say that it would be a good idea to use the higher of the employee retention tax credit amount for 2018 and future years (i.e., $1,000) as your federal income tax withholding rate rather than relying on the higher of the credit amount or the amount of your overall income tax withholding.
Refund Limits
The IRS says that most workers with EITC claims do not receive a refund because the law requires the employer to verify that the income level for the credit is accurate before providing the IRS with the actual refund amount. Because the employer has the discretion to waive the refund and because the refund has been historically low, most people do not receive a full refund of their taxes. For 2018, however, the refund amount is at least as big as in previous years.
The law and IRS regulations changed the regulations regarding employer liability and the use of Form 1099-MISC to determine an employee’s refund. The regulations say that if your employer does not receive a Form 1099-MISC, they must provide you a timely statement on how much you will be receiving in the refund. However, if the employer gives you a Form 1099-MISC, you have the option of withholding the refund or delaying it until the filing date in order to request a refund if you have reason to believe that the income was incorrectly reported.
“After you receive a Form 1099-MISC from your employer, you should take the amount from the form and work it through withholding to get a summary of how much of your total income tax withholding is attributable to the employee and how much is attributable to the employer,” said Jim Knopik, CPA, managing director at Rahman. “If the amounts are very different, you should look into how much of your withholdings are attributable to your employer. If the amount is large, then consider asking for a refund, or hold off on withholding for the year.”
Potential Pitfalls
Unlike most other credits, the employee retention tax credit is one that needs to be reviewed for accuracy each year with your tax professional. The IRS says it encourages using the employee retention tax credit as a way to ease the tax burden on employees who are struggling to make ends meet. This is not a refundable credit and, therefore, not as valuable as a refundable credit. If you have your tax professional do a review, he or she can also determine whether you can take the credit in 2018 for 2022 and whether you can qualify for an advance refund.
The IRS also urges workers to do the appropriate calculations and make sure that they are claiming the right amount, as many credits have rules that vary by age, family size and number of children, as well as marital status, disability, children’s income and college enrollment. Also, if you are unable to obtain a W-2, your tax professional may be able to determine the amount you are eligible for using IRS Forms W-4 and W-3-S.
In short, the Employee Retention Tax Credit is a pretty simple tax credit that is still worth considering if you need to reduce your 2018 or future tax liability. There are no complicated rules or regulations surrounding it, but that doesn’t mean you shouldn’t get a tax professional’s advice before claiming it. If you want more tips on how to lower your tax bill, check out the full post right here!
Why The Definition Of ERC from IRS Might Surprise Essential Businesses?
The IRS clarified this week the definition of “employee retention tax credit,” a pretty basic and complicated credit available to a lot of business owners, sole proprietors and even pass-through entities, which we will explain in more detail below. When tax professionals speak of the employee retention tax credit, they typically refer to one of two benefits that are available to businesses. In 2022, the employee retention tax credit is a nonrefundable tax credit that employers can use to reduce the tax they owe for wage and self-employment taxes on the wages paid to their employees.
According to the IRS, this tax credit can be taken against an employee’s federal and state employment taxes, including FICA, unemployment compensation taxes and tips and gratuities. If you are the employer and file Form W-2, your company will include an Employer Tax Identification Number (ETIN) and W-2 ID in the credits to help taxpayers identify the credit. The ETIN and the W-2 ID are issued by the IRS and require you to complete Form W-8BEN to obtain the correct amount of the credit.
The second part of the employee retention tax credit – a refundable credit – is a relatively new type of tax credit that requires employers to make a prior year’s tax contribution. The refundable portion is a 2 percent refundable tax credit that you can use to offset federal, state and local tax withholdings from your employees. This year, the credit is equal to $230 for a single individual or $480 for a couple filing jointly and can be used to reduce the tax you will owe on the wages paid to your employees for federal and state payroll taxes.
Here is the rub: Employees can claim the employee retention tax credit on a W-2 or pay stub, but can’t claim a refundable portion for the tax that is withheld from their paychecks. That means that, for 2018, workers who are eligible for the employee retention tax credit cannot claim a refundable portion of the credit on the first tax return they file, even if they are self-employed.
For businesses that are the sole proprietorship, LLC, or partnership, the “employee retention tax credit” is a W-2-E, which is similar to a W-2 but includes information about the employee’s pay, as well as some information about their number of employees and that they have made a tax contribution to the IRS.
According to the IRS, the employee retention tax credit can be claimed by self-employed individuals or a company that is a partnership for up to 10 to 50 employees. For companies with more than 10 to 50 employees, there is no separate employee retention tax credit. So, is the employee retention tax credit really something you should consider taking?
“It’s not something to spend your hard-earned tax dollars on if you don’t have to, but I say that from a realistic point of view, because it is not a refundable tax credit,” says Bruce Cleman, a certified public accountant and partner at Cleman Partners in New York City. “It’s not a refundable credit if you have made an additional payroll tax contribution. It’s better to use your tax refund to make a donation to your favorite charity than take a tax deduction for giving a raise to your employees.”
“If you have employees, you will most likely take advantage of this tax credit so that you can reduce your federal income tax and/or state and local income tax withholding by the amount of the employee retention tax credit.”