The U.S. economy is starting to bound back now that the worst of the global pandemic has apparently passed. The recent nonfarm payroll report showed that June saw 850,000 jobs added, and many of those hired received higher wages. The shift in pay structure combined with the tight labor market has put many small businesses in a difficult position of having to pay workers more money with better benefits in order to compete with major corporations: Chipotle is paying workers an average $15 per hour wage and has provided its existing employees with a $200 referral bonus; McDonald’s increased its minimum wage in May, with some positions being promoted through $400 and $500 bonuses; and some Amazon warehouse jobs are offering recruits a $1,000 sign-on bonus. All of this is great news for workers but is challenging to businesses still trying to make up for what they lost during the COVID downturn.
The good news is that there are programs being offered by the federal government that provide these small businesses with upfront cash relative to the employment taxes that they pay. The program is called the Employee Retention Credit (ERC), and despite the remarkable good that it does, it seems that many business owners have not heard about it. For those who have it has provided a real lifeline.
Though most tax credit programs are distributed as reimbursements provided at some future point, the employee retention tax credit is paid upfront in direct proportion to the employment taxes that a small business pays. The program was part of the very first economic relief package inspired by COVID, but as more help was needed it was extended to allow businesses to be reimbursed retroactively for wages paid earlier in the emergency, during 2020 and through the end of 2021.
Businesses submitting claims are eligible for up to 70% cash for up to $10,000 in employee wages paid, or up to $7,000 back per quarter, per employee paid during the calendar year. That $28,000 per employee total per year can make a significant difference for a struggling business, and that is the point. The goal of the Employee Retention Credit was to help small and midsize businesses with 500 or fewer employees that can demonstrate a reduction of at least 20% between their gross receipts for a single quarter of 2021 and the same period in 2019. Businesses that did not experience this kind of drop may still qualify if they can show that they were either partially or completely shut down by the government for the quarters for which they are submitting an ERC claim. This represents a big jump from the original CARES Act legislation passed in 2020. Under that law, businesses needed to show that business had suffered a 50% drop in same-quarter gross receipts from 2019 to be eligible.
Getting ERC cash can be accomplished in a few ways. If 2020 taxes have already been submitted a refund check can be requested by filling out Form 7200 and submitting it through a payroll company or directly to the Department of Treasury’s Internal Revenue System. New businesses are eligible for even larger credits if they formed after February 15, 2020 and ended up having to shut down. This will be particularly helpful for businesses who are struggling with cash flow, as the cash refund is provided on a dollar-for-dollar basis up to the maximum of $7,000 per employee per quarter. For those seeking credit for a current payroll period, the effect is to lower the tax liability for federal withholding, Medicare, and Social Security for each employee. Most businesses are finding that their eligibility differs from quarter to quarter, with most meeting the requirements for quarters in 2020 than in 2021. This is because the loss in revenue between 2020 and 2019 is far greater than the losses between 2021 and 2019.
Not all employee compensation will count towards eligibility for the ERC. In order to be used in the calculations, the payment must count towards FICA taxes. This means that those for whom U.S. Federal payroll taxes were withheld count, and wages paid to relatives of the business owner don’t. Those companies that use hiring bonuses as recruitment tools are able to count those extra payments as qualifying wages for the tax credit program.
The ERC represents an improvement over Congress’s first economic relief package. Where the initial program didn’t provide ERC credits to businesses that received Paycheck Protection Program (PPP) loans, now businesses are able to do both as long as they haven’t applied for PPP loan forgiveness and exclude the loan money that they used to pay wages. This gives business owners the ability to choose how they want to manage their government incentives, and the flexibility to apply for ERC if they apply for forgiveness and are denied. Additionally, any compensation paid from sources other than PPP loan funds are able to be used towards qualifying for the tax credit.
If you have questions about the Employee Retention Credit, contact your business accountant or tax preparer.
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
