IRS Delays, Sudden End to Tax Break Leave Employers Frustrated with Covid

Businesses and nonprofits say the employee- retention tax credit was a valuable lifeline, but they are struggling to get the money

A mechanic at Aureus Group’s Brookhaven, Pa., location. The company received a partial refund of $180,000 from the employee-retention tax credit but is waiting for more. PHOTO: RACHEL WISNIEWSKI FOR THE WALL STREET JOURNAL

Employers are waiting as much as six to 10 months for the Internal Revenue Service to process claims for a popular wage subsidy that was designed to keep workers on payrolls during the Covid-19 pandemic.

IRS delays and federal policy changes are causing the waits, forcing employers trying to claim the employee-retention tax credit to dig deeper into reserves and slowing their recovery, according to business owners, accountants and payroll providers.

“It is taking an extraordinarily long time to get the refunds, much longer than we would have anticipated,” said Jeff Martin, a tax partner at accounting firm Grant Thornton LLP. “If you are looking at cash-strapped employers,” he added, “it can be pretty detrimental.”

Employee-retention tax credits were among a series of policies Congress passed in 2020 and 2021 to help businesses and workers weather the impacts of the virus on the economy. The federal government offered that aid to combat the immediate shock of closures two years ago and the lingering effects during the uneven recovery.

Is your business still waiting on an employee retention tax credit? 

Many employers initially weren’t sure they qualified. So they filed amended tax returns, which typically must be submitted on paper, to claim the credit. As of March 23, the IRS had 1.9 million quarterly employment tax returns to process, plus another 324,000 amended returns. Not all claim the credit, but many do.

“For some taxpayers, it’s been a real bear,” said Jim Donovan, a Minneapolis-based partner at accounting firm Eide Bailly LLP. “I have taxpayers that are like: ‘Gosh, Jim, I needed the money five months ago. I need it right now. When’s it going to come in? I’m having trouble making payroll.’” For others, Mr. Donovan said, the money is icing on the cake, cash they can claim because they qualify.

Meanwhile, claims continue increasing as business owners realize they are eligible or respond to pitches from consulting and accounting firms who check eligibility and help employers claim the credit for a fee.

“We continue to get a decent amount of volume,” said Frank Fiorille, vice president of payroll processor Paychex Inc., which has processed more than $7 billion in requests for the credit. “It can be close to a hundred a day.” The average credit for Paychex customers is $170,000, he said.

Paychex charges small business owners a flat fee averaging about $4,000, Mr. Fiorille said. Some firms charge 10% or more of expected refunds, business owners say.

Congress initially intended the credit to run through 2021, but terminated it a quarter early to save $8.2 billion that helped pay for the bipartisan infrastructure law. When President Biden signed that legislation Nov. 15, the credit was repealed as of Sept. 30, yanking the benefit away from employers that had expected it.

A bipartisan group of lawmakers is seeking a retroactive revival of the credit for the fourth quarter of 2021, pointing to the instability caused by its removal.

“Promises made should be promises kept,” said Rep. Carol Miller (R., W.Va.).

That effort is increasingly unlikely to succeed as the fourth quarter gets further away, congressional aides said.

The employee tax credit and other federal assistance have helped keep the North Carolina Symphony afloat.

The North Carolina Symphony now probably won’t get the $539,000 it had expected that quarter. Still, the group has received about $2 million from the employee tax credit and $5 million in other federal assistance. Those infusions helped fill an $11 million drop in operating income and let the orchestra keep musicians on the payroll and begin reversing pay cuts, said Rob Schiller, the symphony’s senior vice president and chief financial officer.

“We’re grateful, as you might imagine, for every penny,” he said. “They’ve really helped save the industry.”