We heard the radio commercial. We saw the tweets. Many small business owners and others have even been inundated with spam calls about how employee loyalty credit — worth up to $26,000 per employee — can be a game changer.
If you’re hungry for cash, imagine this tax break can work for anyone who’s been forced to keep working during the pandemic. Pretty good deal.
But that can’t be real, can it?
Yes, if it sounds crazy, it probably is – and you could lose a lot of money doing it.
One problem with chasing the big bucks promoted in a tweet or radio ad is that you end up spending big bucks in the form of upfront payments to quick talkers who aren’t telling you the real deal. And you could get in trouble with the Internal Revenue Service.
If you take out the loan when you shouldn’t, you may have to pay it back – plus interest and penalties. Some small businesses could end up owing hundreds of thousands of dollars or more if they file an improper claim.
The IRS again warns that some outside companies are aggressively marketing tax credit programs on radio and social media. Worse, people might argue with their tax experts about why they’re suddenly earning those credits when they’re not actually doing it.
The IRS stated, “Tax professionals are finding they continue to be pressured by people who want to take credit improperly.”
What is the employee loyalty loan?
It is a refundable tax credit for businesses that continued to pay employees while the business was closed during the COVID-19 pandemic or experienced a significant drop in gross receipts from March 13, 2020 to December 31, 2021.
For 2020, qualifying employers could claim up to 50% of $10,000 in qualifying wages or health plan expenses per employee—or a maximum of $5,000 per employee.
For 2021, up to 70% of these expenses could be claimed up to $10,000, for a maximum of $7,000 per employee.
The credit is valid for the last three quarters of 2020 and the first three quarters of 2021.
Combine the two years and you could be paid up to $26,000 per employee, as advertised.
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Why it doesn’t work for many
Key word: company. Upfront, you need to know that this credit is not for individual employees. It’s a credit available to a business, not to all taxpayers.
As with many tax regulations, especially those created to provide relief in the context of pandemics, we are talking about complex regulations here.
For example, the IRS notes that eligible employers cannot claim the withholding credit on wages that have already been reported as a wage expense to receive loan forgiveness under the Paycheck Protection Program or that have been used to claim other credits.
Jon Williamson, senior manager for tax policy and advocacy at the American Institute of Certified Public Accountants, said there are many gray areas when it comes to actually qualifying for the loan. Some lending and incentive firms, he said, use a very loose definition of tax credit terms and requirements to make it seem like more companies qualify when they don’t.
For operations in 2022 and beyond, the pandemic related loan will no longer be offered. However, ongoing ads are causing some companies to revise their previous returns for 2020 or 2021 to take advantage of the generous credit in the CARES Act.
The Coronavirus Aid, Relief, and Economic Security Act, enacted March 27, 2020, provided an employee retention tax credit to encourage eligible employers to keep employees on their payrolls despite tough economic conditions.
Many companies have already taken out the loan. But outside firms continue to push the possibility in radio advertising and social media as an option for others.
“There’s been a non-stop barrage of ads claiming that if you pay employees during the pandemic, these funds are available,” Williamson said.
The ads seem to suggest that the loan is a safe bet, although that’s not the case.
There are two separate and distinct tests, he said. One is to see if gross receipts have gone down over this period, including sales; the other looks at the impact of a government shutdown.
For example, Williamson says, a credit and incentives company might argue that every business has been hit by government shutdowns during the pandemic. But that’s too general.
When it comes to the tax credit, he said, you have to look at how the government shutdown has affected business operations. A “shutdown” request can be made if the business can demonstrate that it has been harmed by a total or partial cessation of operations during the pandemic.
Who will not qualify?
Take, for example, a company that actually saw higher gross revenues during the pandemic. The company may have closed its offices and sent employees home, but employees have been productively working from home. Staff were efficient and able to do the same work as before the pandemic; no business operations were disrupted and the business continued to make money. Such a company would not be affected by the closure under the definition of an employee retention loan, Williamson said, and would likely not qualify for that loan.
In general, it’s clearer that a company would qualify, he said, if a company could show a significant drop in its gross revenue if the government banned “trade, travel or group meetings” due to COVID-19 in 2020 or the first three Quarters restricted from 2021.
You never want your gross earnings to drop, he said, but if you saw a 75% drop due to the pandemic, you’d have a higher level of comfort using the employee retention loan.
“This is a purely numerical fact that is difficult to question,” he said.
As for someone who kept working? No, they don’t get credit now and never will.
“Often when you append the word ’employee’ to a credit, I can see where some confusion arises,” Williamson said. But again, it’s a loan to the employer, not the employee.
The loan itself was clearly abused by scammers, said Mark Steber, chief tax officer at Jackson Hewitt Tax Service.
“I suspect that most professionals who offer help or assistance with employer retention credit are very legitimate and experts in the field,” Steber said.
“But not all and some are just criminals.”
Scammers are looking at all sorts of ways to engineer tax refunds that aren’t coming, he said, including tapping stimulus programs in the wrong way or abusing a tax credit a few years ago that was once offered to new homeowners.
“Tax benefits and the money that goes with them sometimes attract bad players,” Steber said.
It might sound like it should go without saying, but you really shouldn’t expect to find solid, complete tax advice on Twitter or TikTok. The IRS has also warned about other schemes to avoid this tax season.
A program now being promoted on social media, according to the IRS, encourages people to use tax software to manually fill out their own Form W-2, payroll and tax returns. You choose the employer, you choose the income, and you create the fictitious figure for taxes that have already been withheld from that bogus job.
According to the IRS, people are being told to file the fake tax returns electronically in “hopes of a substantial refund — sometimes in the tens of thousands — due to the high withholding taxes.”
The taxpayer is liable for incorrect information.
Yes, that’s not a smart idea.
You don’t want to apply for a credit or tax refund that you’re not entitled to.
The IRS issued a similar warning in October to “be wary of advertised programs and direct solicitations that promise too good to be true tax savings.”
In some cases, the IRS warned, you could overstate your payroll deductions.
The IRS warned that promoters aggressively mislead people. You have to be skeptical and check the guidelines.
According to Acting IRS Commissioner Doug O’Donnell, if a tax expert raises questions about the veracity of such a claim and tries to caution you against claiming the employee retention credit, you should listen to their advice.
“The IRS is actively reviewing and conducting criminal investigations related to these false claims. People have to think twice before saying this,” O’Donnell said in a statement.
The IRS said taxpayers can report tax-related illegal activity related to employee retention loan claims on Form 14242.
If a business or individual claimed the credit when they now realize they shouldn’t have, the IRS and tax experts recommend filing an amended return to correct an excessive payroll deduction.
Contact Susan Tompor: stompor@freepress.com. Follow her on Twitter @tomp. To subscribe, please go to freep.com/specialoffer.
