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Small Business Hiring Tax Credit for CA Employers- Effective Dec. 1, 2020

a person putting money into a piggy bank.

Many California employees and employers faced challenges as the coronavirus impacted their workplaces. During this difficult time, business owners had to make tough decisions in order to stay afloat. Ultimately, this led to many lay-offs in the state. With rising unemployment rates, the California government decided to take action. In order to remedy this economic and unemployment setback, Governor Gavin Newsom enacted Senate Bill 1447, the Small Business Hiring Tax Credit, on September 9, 2020. This bill allows any qualified employer credit against personal income and/or corporate taxes for each taxable year beginning on or after January 1, 2020. 

Do you qualify for assistance? Let’s find out:

How Did This Start?

On September 9, 2020, California Governer, Gavin Newsom, signed the senate bill that established the “Main Street” Small Business Hiring Tax Credit. Tax credits are used to help reduce the amount of taxes business owners all over the state owe. Taxpayers can use this new credit against California state income taxes or sales and use taxes. This bill authorizes small business owners to use their earned credits against any qualified sales and use taxes in the periods January 1, 2020, until April 30, 20206.

Overall, this bill will save struggling business owners large amounts of money because it lowers the amount of taxes they have to pay throughout the next few years. With alleviated taxes, they’ll be able to put their funds back into their business and hardworking staff members. Governer Gavin Newsom hopes that this will bring employees back into the workforce and help remedy their unemployment issues.

Business Owner Qualification

Certain small business owners qualify for this tax credit. In order to qualify, you must meet these specific requirements:

To find out if you’ve received at least a 50% decrease in income tax gross receipts, you can keep this example from the CDTFA in mind:

Example: You had $250,000 in gross receipts for second quarter 2019 and $100,000 in gross receipts for second quarter 2020. The percent of decrease in gross receipts is 60 percent. ($250,000 – $100,000 = $150,000. $150,000 ÷ $250,000 = 0.6 x 100 = 60%)

California Department of Tax and Fee Administration, 2020

Employee Qualification

In order for one of your employees to qualify for the tax credit, the employee must meet the following requirements:

  • Must get paid wages from their employer (can be part time or full time)
  • Cannot obtain wages that are used in the calculator of other tax credits
  • Must not be an independent contractor.

If your employees meet these requirements you’re eligible to earn ~$1,000 of tax credits per employee.

Please keep in mind that California’s Division 6 section 13000 defines an employee as:

“Employee” means a resident individual who receives remuneration for services performed within or without this state or a nonresident individual who receives remuneration for services performed within this state and includes an officer, employee, or elected official of the United States, a state, territory, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing. “Employee” also includes an officer of a corporation.

Whether an individual provides equipment in the performance of services for remuneration shall not be considered in a determination of whether that individual is an employee.

CA.GOV

How Much Credit You’ll Earn

Most employers will receive a credit of $1,000 for each employee. Furthermore, each employer is capped at $100,000, which means that you can’t earn more even if you’ve hired more qualified employees. In addition to that, employers will not accrue any interest on any credit amount received. You can use your credit until it’s either succeeded for a certain number of years or until it has hit the April 30 2026 deadline. If you have any remaining credit after your approved time, you’ll have to forfeit your funds. You can read more about how your credit is applied here.

Also, please note that all credits for every single California employer are exhausted at $100 million.

Applying for Assistance

All credit reservations are on a first-come-first-serve basis. The reservation system opened up on December 1, 2020 and closes on January 15, 2021. According to the CDTFA, each applicant will receive a notification via email if they qualify. There, you’ll also see the amount of credit you will receive.

Items You’ll Need for your Application

In order to apply for your credit assistance, according to the CDTFA, you’ll need to provide:

  • Valid email address
  • Irrevocable election to apply the credit to:
    • Personal and/or Corporate Income Tax, or
    • Sales & Use Tax
  • Type of entity (Individual, Corporation, Partnership, LLC, S Corporation, etc.)
  • Entity identification number (SSN, FEIN, Corporation number, LLC number, etc.)
  • Business entity name or owner name
  • DBA (Doing Business As)
  • Business mailing address
  • Business phone number
  • If you make an irrevocable election to apply the credit to sales and use taxes, provide all sales and use tax accounts (i.e. seller permit(s) and use tax account(s)) for the business entity named above
  • EDD Employer Payroll Tax Account number (State Employer ID number (SEIN))
  • Number of employees as of December 31, 2019
  • Total gross receipts for the following periods:
    • April 1, 2019 through June 30, 2019
    • April 1, 2020 through June 30, 2020
  • The average monthly full-time equivalent (FTE) qualified employees employed during the following period (please see the Calculation FAQs):
    • April 1, 2020 through June 30, 2020 (3-month period)
    • July 1, 2020 through November 30, 2020 (5-month period)

In order to claim your credits, you’ll need to file your income tax return and submit your Small Business Hiring Credit with certificate. Form FTB 3866 will be available soon here.

Getting Started With Your Hiring Tax Credit

If you’re a California small business owner and you’ve faced economic declines during the pandemic, you may be eligible for a Small Business Tax Credit. To start your application process, simply request a tentative credit reservation online. As of December 4, 2020, $34,174,758 of the allotted $100,000,000 has been claimed by business owners. Get to this as quickly as possible so you can benefit from the Small Business Tax Credit opportunity.

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