Small Business Payroll Tax Credits: The 2022 Expert Guide & FAQs (2024)

Tax credits for small businesses can help them stay afloat, particularly during an economicdownturn. For example, in the midst of the COVID-19 pandemic, the 2020 employee retentioncredit provided a $5,000 credit per employee for qualifying companies. Tax credits helpbusinesses get off the ground, keep their doors open and invest in strategic areas. Payrolltax credits reduce a business’s liability for payroll taxes such as Social Securityand Medicare taxes.

What Are Payroll Tax Credits?

Payroll tax credits decrease the amount of payroll taxes a business owes. Payroll taxes areimposed on employers and employees and include income tax, Social Security and Medicaretaxes (or Federal InsuranceContributions Act (FICA), and federal unemployment tax. Small business payroll taxcredits reduce the amount that employers contribute to these taxes.

For example, employers and employees normally split responsibility equally for socialsecurity taxes, which total 12.4% on employee earnings (up to $137,700 in 2020). Somepayroll tax credits reduce or even eliminate the employer’s share of those taxes.

Key Takeaways

Tax credits are a dollar-for-dollar offset of federal income tax liability.
By keeping up to date on current tax credits and eligibility requirements, smallbusinesses can reduce their tax obligations. That extra cash can be invested to growyour business.
The General Business Credit currentlyincludes 29 different credits toward the cost of creating pensionplans, providing childcare facilities, buying or using non-gasoline vehicles and otheractivities.
The employee retention credit — a payroll tax credit created by the government in2020 to help businesses during the coronavirus pandemic — saw significant changesin 2021.

Why Do Tax Credits Exist?

Tax credits help reduce a company’s tax bill as an incentive to engage in practicesthat benefit individuals and communities. And by holding onto cash that would have normallybeen paid in taxes, businesses invest in strategic areas to become more profitable.

Why Are Tax Credits Important?

Tax credits are considered important for several reasons. Because tax credits are used toincentivize desired behavior and actions, they can be valuable tools in achieving a desiredoutcome. For instance, if a government wants to convince taxpayers to go green for theenvironment, they might provide tax credits for energy efficient products like alternativefuels. Want to promote higher education? Place tax credits around continued learning. Taxcredits become extremely important when it comes to stimulating economic performance,inclusion and stability. For small businesses in particular, available tax credits can givethem an edge over larger firms, promoting market competitiveness.

How Tax Credits Work & How to Claim Them

How does the payroll tax work? Put simply, a tax credit is a dollar-per-dollar reduction inthe income tax owed. Depending on the amount owed versus the credit, it will either reducethe amount of tax owed or increase the amount of the refund.

The IRS offers guides for both individuals and businessesthat list all possible credits and deductions. Guides include detailed documentation ortools around each credit to help determine eligibility.

Once eligibility is determined, each individual tax credit requires its own form. If eligiblefor more than one credit, a business will also have to file a Form 3800, GeneralBusiness Credit. On Form 3800, each of the credits will be added up to calculate thetotal value of all tax credits.

Small-Business Tax Credits Vs. Tax Deductions: What’s The Difference?

Tax credits are applied directly to your tax bill. If you owe $100,000 in tax but areeligible for a $40,000 credit, your tax liability — the amount you must pay theInternal Revenue Service (IRS) — is $60,000. There are two types of tax credits:

13 Tax Credits You Should Know About

These payroll tax credits decrease the amount of payroll taxes your business owes.

General Business Credit. It currently includes 29 credits for the current year as well as any unusedportions of nonrefundable credits carried forward from prior years.

When the amount of the credit is higher than allowed in the current year, the excess canbe applied to increase your General Business Credit on tax returns filed in previousyears. You must file IRS Form 3800 to claim any of the General Business Credits; inaddition, there are specific forms for estimating and claiming each credit.

It’s important to review availability and eligibility each tax year because newcredits are offered, and as your business changes you may be able to claim tax creditson your payroll tax returns for which you were previously ineligible.

Here’s a short list of some General Business Credits your business may want toexplore.

Credit for small employer pension plan startupcosts: Helps businesses with the cost of setting up qualifiedplans.
Credit for employer-provided childcare facilities andservices: Offsets the cost of providing childcare facilities foremployees.
Energy efficient home credit: Contractors canclaim this credit for selling or leasing energy-efficient residences.
Low-income housing credit: Provides credits toowners of rental buildings in low-income housing projects.
Work opportunity tax credit (WOTC): This creditbenefits employers that hire people in specific categories — including long-termunemployment recipients, some veterans, recipients of various kinds of public assistanceand those who face significant barriers to employment. The amount of the credit variesdepending on the category, up to $9,600 per employee. This credit is claimed by filingForm 5884.
Alternative fuel/motor vehicle tax credits: Several General BusinessCredits and other tax credits are available to help encourage the use of environmentallyfriendly vehicles. They include credits for electricvehicles, hydrogen fuel cell vehicles and using or selling biodiesel or otherbiofuels.
Qualified small business R&D payroll taxcredit: The R&D payroll tax credit is an incentive aimed specifically atstartups. It can be used to offset payroll and income tax liability. Qualifiedcompanies:

Have less than $5 million in revenue over five years with qualifying researchactivities and expenditures.
Have less than five years of revenue.
May claim R&D tax credits against the employer portion of Social Securitypayroll tax, which is 6.2 percent of wages paid, up to $8,239.80 per year peremployee.
Can apply up to $250,000 of the research credit against payroll tax liability.

Any unused R&D credits that aren't elected to offset payroll taxes may be carriedforward for up to 20 years and used when the business becomes profitable.

Newmarkets tax credit: This credit is intended to spur development inlow-income communities. The U.S. Treasury Department's Community Development Financial Institutions Fund administers theprogram, which offers tax incentives to encourage private investors to invest inprojects. The credit (39% of the total investment) is distributed over seven years.

Credit for small employer health insurancepremiums: This credit helps cover premiums for health insurancepurchased through the Small Business Health Options Program (SHOP). It can be worth upto 50% of your premium contributions (for tax-exempt employers, that figure is up to35%). To claim the credit, you must:

Have fewer than 25 full-time equivalent (FTE) employees.
Pay employees an average salary of $56,000 per year or less, adjusted annually forinflation.
Contribute at least 50% of premium costs for employees (though not dependents).
Enroll in coverage through SHOP.

Businesses can benefit from the credit in the current tax year or in previous years byfiling an amended return; however, refund limitations may apply.

Employer credit for paid family and medicalleave: This credit is for employers that provide paid family and medical leaveto employees. To qualify forthe credit, employers must have a written policy that provides:

At least two weeks of paid family and medical leave annually to all qualifyingemployees.
At least 50% of wages normally paid to the employee.

The credit is equal to a percentage of wages paid to qualified employees during familyand medical leave.

Status of 2020 Tax Credits for Small Businesses

The federal government’s response to the coronavirus pandemic in2020 included new small business tax credits, which continued to be active in 2021.

Manage Your Small Business Taxes with NetSuite

Small businesses taxes keep increasing in complexity — especially when companies wantto take advantage of advantageous tax credits. Ensure that your small business has thevisibility and documentation needed for successful tax management through NetSuite’smodern, cloud-based platform with solutions in ERP, accounting, and more.

7 Things You Need to Know About the Employee Retention Credit for 2021 Taxes

Here are seven important points about the updated employeeretention credit.

The employee retention credit helps businesses impacted by the coronavirus pandemic keepemployees on the payroll for as long as possible by offering a credit toward theemployer’s share of employment taxes.
The Consolidated Appropriation Act (CAA) released enacted at the beginning of 2021permitted employers to seek the employee retention tax credit, even if they had receiveda PPP loan. However, taxpayers cannot claim the ERC on PPP wages used for PPP loanforgiveness.
Who qualifies for the payroll tax credit? To be eligible, businesses must haveexperienced a partial or total government-ordered shutdown, or a“significant” decline in gross receipts.

In 2020, a significant decline is a50% decrease in grossreceiptscompared to the same calendar quarter in 2019.
In 2021, a significant decline is a20% decrease in grossreceiptscompared to the same quarter in 2019.

For 2020, the credit can reduce your tax bill by 50% of up to $10,000 of eachemployee’s qualified wages (including healthcare premium costs) each quarterthrough Dec. 31, 2020. For 2021, the credit is 70% of all qualified wages from January1, 2021 to September 30, 2021 (This excludes recovery startup businesses, which cancontinue taking advantage of the credit until December 31, 2021). It’s limited to$10,000 in wages per employeeforanyquarter, meaning you canclaim$7,000for eachemployeein every quarter. The maximum creditis$21,000 per employee.

To be considered a “recovery startup business” and continue your ERC creditinto the fourth quarter of 2021, businesses must meet the following criteria:

Began operations on or after February 15, 2020.
Maintains average annual gross receipts that do not exceed $1 million.
Employs one or more employees (other than 50% owners)
Does not otherwise qualify for the credit (i.e. did not experience a partial ortotal government-ordered shutdown, or a “significant” decline in grossreceipts.

Recovery startup businesses are still qualified to request advance payment of employeeretention credit through IRS Form 7200 for the fourth quarter of 2021 — deadline isJanuary 31, 2022.

Because it’s a refundable credit, the portion of the credit you don’t needis considered an over-payment of payrolltaxes and will be returned when you file your federal taxes.

The IRS also allows you to reduce your quarterly employment tax deposits, increasingyour cash on hand and boosting your business’s odds of survival.

As your business grows and new tax policy is released, it’s vital to stay up to date onthe latest payroll calculations, deductions and credits. Even for small businesses andstartups, one of the best and most efficient ways to not leave money on the table is toinvest in a business accounting software platform. With NetSuite Finance, Accounting andPayroll in addition to the other reporting and tracking features, you have access to currenttax management features in one simple, easy-to-use system. Additionally, it integratesseamlessly with other powerful software, like Human Capital Management that helpmake payroll processing easier and scalable as your business grows and changes.

Payroll Tax Credit FAQs

What is the difference between payroll taxes and employment taxes?

Both are taxes that employers pay directly to the IRS. While there is overlap between thesetax terms, employment taxes refer to the taxes paid to the IRS directly from the employer.They include income, Social Security, Medicare and Federal Unemployment Tax Act (FUTA)taxes. Payroll taxes refers to the taxes deducted to fund Medicare and Social Securityprograms in the U.S.

Do owners qualify for the employee retention credit?

Wages paid to those with more than 50% ownership in a business do not qualify for the ERC.Wages paid to an individual related to a majority shareholder are also not consideredeligible.

How does the small business tax credit work?

The ERC credit can be claimed by reporting total qualified wages for each calendar quarter onForm 941,Employer’s Quarterly Federal Tax Return. The FFRC credit can also be claimedvia Form 941, where employers will report any qualified sick or family leave.

What should employers do if they received an advance payment of the employeeretention credit or reduced their employment tax deposits in anticipation of receivingthe ERC for the fourth calendar quarter of 2021?

Because the ERC was unexpectedly terminated a quarter early due to the enactment of theInfrastructure Investment and Jobs Act, employers must repay any erroneous advanced paymentsor adjust any reduced deposits. Employers must repay any advanced payments by the due dateof their employment tax return that includes the fourth quarter of 2021 to avoid anypenalties. Similarly, employers that reduced their deposit in regards to wages paid on orafter October 1, 2021 in anticipation of the ERC they expected to claim must deposit thosetaxes by December 20, 2021.

How long does it take to get an ERC return?

Generally, you will receive your refundwithin 3 weeks if you fileelectronicallyor 8 weeks if you mail your return.