The tax credit landscape has become a bit complicated over the last year. Don’t miss out on every opportunity to claim credits you’re due.
ERTC, WOTC, FICA, the alphabet soup of tax credits can be confusing, especially when the rules for some, such as the ERTC, have changed over the past two years. Nonetheless, it’s worth verifying that you’re claiming all the credits you qualify to receive.
ERTC
The Employee Retention Tax Credit can be applied retroactively and allows restaurant operators to lower their federal quarterly payroll tax bill.
The ERTC was originally intended to be a localized credit to apply in singular situations—for example, a tax credit to help you pay employees should a hurricane render your restaurant inoperable. It became a national tax credit option in 2020 for small businesses shut down by the pandemic.
For the 2021 ERTC, a business with 500 or fewer employees can claim up to $7,000 per employee per quarter for the first three quarters of the year. To qualify, the business must show a 20% or more decline in gross receipts for each quarter claimed or show it was subject to a government-ordered capacity restriction.
Funding for the ERTC in the fourth quarter was pulled back to help fund the Infrastructure Investment and Jobs Act. So, note that you cannot apply for the ERTC for the fourth quarter of 2021 (Oct.-Dec.). The IRS has become severely backlogged in processing ERTC payouts (which will happen when a tax intended for localized applications goes national), but rest assured, qualified credits will all be paid eventually. (Note: If you received a Paycheck Protection Program loan and are applying for loan forgiveness, consult a tax professional to navigate how PPP loan forgiveness and ERTC work in the same year.) Read more on the ERTC .
WOTC
The Work Opportunity Tax Credit is a federal tax credit for hiring applicants from groups who face significant barriers to employment—including individuals unemployed for 27 weeks or longer.
With hiring needs at an all-time high, now is a great time to take advantage of this tax credit, which can help offset the cost of turnover and cover recruitment incentives, including hiring bonuses.
To qualify, a new hire must fit into one of the target groups identified by the U.S. Department of Labor, which includes long-term unemployment recipients, qualified veterans or justice-involved individuals, food-stamp recipients, summer youth hires and others. For a complete list, see here .
Restaurants can earn a maximum credit of $2,400 for each employee coming off long-term unemployment at the time of hire. Employers earn a credit equal to 25% of the employee’s wages if the staffer works at least 120 hours in the first year and 40% if the individual works at least 400 hours—up to the $2,400 cap, but some targeted categories offer an even larger credit. For more information, check out IRS Form 8850 .
FICA
The Federal Insurance Contributions Act is only available to businesses in the food and beverage industry who employ tipped servers. If your tipped employees made above the federal minimum wage ($7.25 an hour), you may be eligible for the FICA Tip Credit.
According to the IRS, this tax credit equals the amount of Social Security and Medicare taxes the employer paid on tips received by the tipped worker whether they were cash tips, charge-card tips cashed out at the end of the shift, or charge-card tips distributed through payroll.
To qualify to receive the FICA tax credit, employers have to ensure that their employees are making at least the federal minimum wage. If the state has a higher minimum wage, employees’ wages have to hit that minimum (total compensation includes wages, tips, meals, lodging, and service charges).
If your tipped employees made above federal minimum wage (or the state’s minimum wage, whichever is higher), you as an employer can claim the FICA tax credit on that portion of their wages.
The formula is:
Hours x (hourly rate + reported tips) = Weekly wages
Hours x federal wage rate = Wages paid at minimum wage
Weekly wages – (Wages paid at minimum wage x FICA 7.65%) = FICA Tax Credit
FICA Tax Credit x 52 Weeks = Total tax credit you can receive per employee
The form to claim FICA is IRS Form 8846.
Heartland provides entrepreneurs with software-driven technology to manage and grow their business. The company serves more than 400,000 merchants nationwide, delivering trusted solutions for payment, payroll and human resources, point of sale, customer engagement and lending. Heartland is a leading industry advocate of transparency, merchant rights and security. Heartland is a Global Payments Company (NYSE: GPN). Learn more at Heartland.