How does the employee retention credit program affect past wages paid and current payroll taxes?
The Employee Retention Credit (ERC) has been a lifeline for many small to medium-sized businesses navigating the challenges brought on by the COVID-19 pandemic. As a tax credit offered by the Internal Revenue Service (IRS), it aims to help employers retain their workforce while providing financial relief.
However, there’s often confusion surrounding its impact on wages and payroll taxes. We’ll explore how ERC affects these aspects of your business and shed light on important updates and eligibility requirements you need to be aware of. Yes, they may or may not affect your tax liability, however, past business taxes from 2020 or 2021 will have to be amended depending what ERC refund checks you receive for those tax years.
If you have not already filed, you can still claim the employee retention credit retroactively in 2023, 2024, and 2025.
Key ERC Credit Takeaways You Will Learn:
- ERC Provides Financial Relief: It offers financial support to businesses affected by COVID-19, encouraging employee retention.
- Not a Direct Wage Reduction: The ERC doesn’t directly reduce employee wages but helps cover payroll expenses.
- Reduces Employer’s Payroll Taxes: By applying a credit to employment taxes, it lowers overall payroll tax liability for employers.
- Eligibility Criteria: Businesses must meet specific criteria, such as experiencing a decline in gross receipts or being a recovery startup business.
- Retroactive Claims Possible: Businesses can claim the ERC retroactively in 2023, 2024, and 2025 for past tax years.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Key Aspects of the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a tax credit offered by the IRS that provides financial relief to eligible employers impacted by the COVID-19 pandemic, incentivizing them to retain their employees.
ERC Reduce Wages or Payroll Taxes: Definition And Purpose
The Employee Retention Credit (ERC) is a refundable payroll tax credit introduced by the Internal Revenue Service (IRS) in response to the COVID-19 pandemic. Its primary purpose is to provide financial relief for small to medium-sized businesses and encourage them to retain their employees during economic hardship.
For instance, if there was a small business experiencing significant declines in revenue due to the pandemic, it might consider laying off employees as one of its cost-cutting measures.
To avoid this, the ERC provides an incentive for these employers by allowing them to apply a portion of qualified wages paid against their employment taxes – thus significantly lowering their financial burden while keeping valued employees on board.
Important Eligibility Criteria for ERC
To qualify for the Employee Retention Credit, Small to Medium-Sized Business Owners should be aware of specific criteria that must be met:
1. The business must have experienced either a significant decline in gross receipts, a full or partial suspension of operations due to governmental orders related to COVID-19, or be a recovery startup business.
2. A significant decline in gross receipts is defined as at least a 20% reduction compared to the same calendar quarter in 2019.
3. Recovery startup businesses are those that began after February 15, 2020, and have annual gross receipts not exceeding $1 million.
4. Eligible employers can be corporations, tax-exempt organizations, partnerships, and sole proprietors.
5. Employers must pay qualified wages to their employees during eligible quarters.
6. Governmental entities may be eligible under certain circumstances; however, federal agencies and instrumentalities are generally excluded from eligibility.
By understanding these eligibility criteria, Small to Medium-Sized Business Owners can determine if they qualify for the ERC and make informed decisions about how this tax credit could benefit their businesses.
Benefits of ERC For Small Businesses
The Employee Retention Credit offers numerous benefits to small businesses, providing much-needed financial relief during these challenging times. As a refundable payroll tax credit, the ERC helps eligible employers reduce their overall payroll costs and allows them to maintain a stable workforce.
For example, a small business with ten employees earning $30,000 each in qualified wages could receive up to $30,000 in ERC (assuming they can claim the maximum 50% credit on the first $10,000 per employee).
This monetary boost enables them to sustain their operations without laying off workers or drastically cutting down hours.
Benefits Of ERC For Employers
ERC helps employers retain employees, reduces overall payroll costs, and provides financial relief during the COVID-19 pandemic.
ERC Helps Retain Employees
The Employee Retention Credit (ERC) is a valuable tool for small to medium-sized businesses, particularly during economic uncertainty like the COVID-19 pandemic.
One of the primary benefits of ERC is that it helps incentivize employers to retain their employees by reducing overall payroll costs.
For example, a restaurant owner wants to keep their entire team employed but struggles financially due to decreased business during the pandemic. The ERC allows them to reduce their tax liability while keeping all employees on staff without cutting salaries or wages.
This provides financial relief for both employer and employee, creating a win-win situation for everyone involved.
Reduces Overall Payroll Costs with the ERTC
One of the most significant benefits of the Employee Retention Credit (ERC) for small to medium-sized business owners is that it can reduce overall payroll costs. By providing a refundable payroll tax credit of up to $33,000 per employee, eligible employers can offset some or all of their employment taxes owed.
For example, let’s say you own a restaurant with twenty full-time employees earning an average hourly wage of $15. With the ERC in place, you could potentially receive a credit worth $660,000 ($33,000 x 20 employees) over two quarters.
By using the ERC strategically and consulting with an experienced tax professional who thoroughly understands its nuances and eligibility requirements, small businesses can take advantage of this opportunity to stay competitive and thrive amidst economic uncertainty.
Provides Financial Relief During The COVID-19 Pandemic
The COVID-19 pandemic has put a significant strain on businesses of all sizes. The Employee Retention Credit (ERC) provides financial relief for employers struggling to keep their doors open during these challenging times.
The ERC incentivizes employers to retain employees by offering a refundable tax credit, which can offset the costs of retaining team members, such as payroll taxes and qualified wages.
The pandemic has hit small businesses particularly hard, and they may struggle with cash flow issues due to decreased revenue. The ERC provides much-needed financial support while allowing small business owners to focus on keeping their operations running smoothly without worrying about layoffs or furloughs.
Additionally, new guidance has been issued for the third and fourth quarter of 2022, making it easier for eligible employers to claim this credit.
ERC and Its Impact On Wages
ERC does not directly reduce employee wages, but employers can use the credit to cover payroll expenses and help retain employees.
ERC Does Not Directly Reduce Employee Wages
It’s important to note that the Employee Retention Credit (ERC) does not directly reduce employee wages. Instead, it provides financial relief for eligible employers during the COVID-19 pandemic by offering up to $33,000 in refundable payroll tax credits per employee.
For example, a small business has five employees earning $50,000 annually. The employer could receive up to $165,000 in ERCs for retaining those employees during the pandemic.
It’s worth noting that there are limitations and eligibility criteria surrounding ERCs.
Employers Can Use ERC To Cover Payroll Expenses
One of the benefits of the Employee Retention Credit (ERC) for employers is that they can use it to cover payroll expenses. This means eligible businesses can claim a credit against their payroll taxes equal to 70% of qualified wages paid from December 31, 2020, until December 31, 2022.
For example, suppose a business paid $10,000 in qualified wages to an eligible employee during Q3 or Q4 of this year and meets all other criteria for ERC eligibility. In that case, they may claim a tax credit equaling up to $7,000 per employee on their federal employment tax returns.
This reduces their overall payroll costs and helps provide financial relief during these economic times.
Examples Of How ERC Can Benefit Employers
The Employee Retention Credit (ERC) offers significant benefits to eligible employers. Here are some examples of how ERC can help small to medium-sized business owners:
1. Cover Payroll Expenses: Employers can use the ERC to cover payroll expenses, including wages, health benefits, and retirement contributions, among others.
2. Reduce Payroll Taxes: The ERC reduces the employer’s share of payroll taxes, which means a lower overall payroll tax liability.
3. Financial Relief during the Pandemic: The COVID-19 pandemic has been financially challenging for many businesses. The ERC provides much-needed financial relief to eligible employers who have experienced a significant decline in revenue or had to shut down operations due to government orders.
4. Keep Employees: The main goal of the ERC is to incentivize employers to retain their employees during these challenging times by providing a refundable tax credit for qualified wages paid to employees.
5. Lower Overall Payroll Costs: Employers can significantly lower their overall payroll costs by covering payroll expenses and reducing payroll taxes, leading to more savings and increased profitability.
6. Use with Other Tax Credits: Eligible employers can use the ERC alongside other tax credits, such as PPP loans, making it easier to manage their finances and stay profitable.
7. Sustainability of Small Business: Through the financial relief provided by the ERC, small businesses that may have otherwise closed down permanently could remain operational and sustainable even after the pandemic’s effects wear off.
Overall, the ERC provides various benefits to help small to medium-sized business owners reduce costs while retaining employees during these difficult times.
ERC And Its Impact On Payroll Taxes
The ERC reduces the employer’s share of payroll taxes, reducing overall payroll tax liability.
ERC Reduces Employer’s Share Of Payroll Taxes
Employers can also benefit from ERC by reducing their share of payroll taxes. The credit is refundable and can be applied to the employer’s share of Medicare taxes paid on qualified wages paid after March 12, 2020, and before January 1, 2022.
For example, suppose an eligible employer pays $20,000 in qualified wages during Q3 or Q4 of 2022 to retain their employees due to a COVID-19 related government shutdown order and qualifies for the credit at the maximum rate of 70%. In that case, they can save up to $14,000 against their required deposit for federal employment taxes in Q3 or Q4.
It’s important to note that while ERC reduces the employer’s share of payroll taxes, it does not affect employee withholding amounts or Social Security payments.
Reduces Overall Payroll Tax Liability
One significant benefit of the Employee Retention Credit (ERC) for employers is its ability to reduce overall payroll tax liability. The ERC provides a refundable payroll tax credit equal to 70% of qualified wages paid between January 1, 2021, and December 31, 2022, up to $28,000 per employee.
For example, if an employer paid $10,000 in qualified wages during Q3 of 2022 and claimed the ERC for that quarter, they could receive a credit of up to $7,000 against their share of Social Security taxes.
It’s important to note that claiming the ERC may require adjustments when filling out employment tax returns or making deposits with the IRS.
Examples Of How ERC Can Help Employers
The Employee Retention Credit (ERC) can provide significant financial relief to small to medium-sized business owners during the COVID-19 pandemic. Here are some examples of how ERC can help employers:
1. Covering Payroll Expenses: Employers can use the ERC to cover payroll expenses for eligible employees, which can help reduce their overall payroll costs.
2. Providing Financial Relief: The ERC provides a refundable tax credit that can be used to offset the employer’s share of Social Security taxes, which can provide much-needed financial relief for struggling businesses.
3. Retaining Employees: By providing financial incentives, the ERC encourages employers to keep their staff on board rather than laying them off or reducing their hours.
4. Reducing Tax Liabilities: The ERC reduces the employer’s share of payroll taxes, which helps reduce their overall tax liability.
5. Improving Cash Flow: Because the ERC is a refundable tax credit, it can improve cash flow by providing businesses with additional funds that they can use to pay for other expenses.
Overall, the Employee Retention Credit is a valuable tool that small to medium-sized business owners should consider when looking for ways to reduce their payroll costs and improve their bottom line. With new guidance issued in Q3 and Q4 of 2022, employers need to stay up-to-date with the latest information about this tax credit so they can make informed decisions about how best to utilize it.
Eligibility And Application For ERC
To qualify for the ERC, eligible employers must have experienced either a significant decline in gross receipts or a full or partial suspension of business operations due to government orders related to COVID-19; employers can claim the credit on their quarterly employment tax returns.
Specific Criteria To Qualify
To qualify for the Employee Retention Credit (ERC), businesses must meet the following criteria:
1. Have gross receipts less than 80% of what they were in the same quarter in 2019 or have been partially or fully suspended due to government orders related to COVID-19.
2. The business must be operational during the period for which the credit is claimed.
3. The employees retained must not be related to the employer, which means no family members such as spouses, children, siblings, or parents.
4. The employees retained must work at least 20 hours per week on average during the calendar quarter for which ERC is claimed.
5. Eligible wages used to calculate ERC can include certain health plan expenses and retirement contributions.
It’s important to note that each quarter has its criteria, so businesses must review eligibility requirements for each period they intend to claim ERC. Additionally, some industries may have specific guidelines or limitations on how the credit can be applied, so it’s essential to consult with a tax professional if there are any uncertainties.
Eligibility Depends On The Size And Type Of Business
The size and type of business are important factors in being eligible for the Employee Retention Credit (ERC). The ERC is available to businesses with gross receipts that fell more than 20% in any quarter compared to the same period in 2019 due to COVID-19 or those whose operations were fully or partially suspended due to government orders.
All wages paid may qualify for ERC purposes for small businesses, defined as employers with an average of 500 employees or less in 2019. However, only wages paid for non-working employees will be considered qualified wages for larger companies.
For example, if a small business has experienced a decline in gross receipts due to the pandemic, it could claim the ERC on all wages paid during qualifying periods.
Claiming The Credit On Quarterly Employment Tax Returns
To claim the Employee Retention Credit (ERC), eligible employers must file for it on their quarterly employment tax returns. The credit is claimed by reducing the payroll taxes owed to the IRS rather than as a separate line item on the return.
This means employers can immediately benefit from the credit and reduce their overall payroll tax liability.
Employers should remember that they cannot claim ERC and Paycheck Protection Program (PPP) loan forgiveness for the same wages paid. In addition, there are specific criteria to qualify for ERC and limitations on how much can be claimed each quarter.
Limitations And Restrictions of ERC
ERC cannot be used for the same wages used for PPP and cannot be used with other tax credits, limiting its full potential in certain situations.
It cannot Be Used For The Same Wages Used For PPP
It’s important to note that the ERC cannot be used for wages already used for PPP loan forgiveness. The same wages cannot be claimed under both programs, as this would result in double-dipping and could lead to penalties and fines.
This limitation can make it challenging for small business owners who may have already utilized their PPP funds on payroll expenses but are still struggling financially due to the COVID-19 pandemic.
However, many other qualified wage expenses can still be used towards the ERC, such as health benefits and retirement contributions.
It cannot Be Used With Other Tax Credits
It’s important to note that the Employee Retention Credit (ERC) cannot be used with other tax credits. You cannot claim the ERC for the same wages if you claim another tax credit, such as the Work Opportunity Tax Credit (WOTC).
For example, let’s say your business is eligible for the ERC and WOTC for certain employees. If you claim $20,000 in qualified wages under WOTC, you cannot also claim those same wages under ERC.
However, you could choose to claim different sets of qualified wages under each credit program to maximize your benefits.
Examples of Situations Where ERC Is Limited
Small to medium-sized businesses need to be aware of certain limitations and restrictions to the Employee Retention Credit (ERC). Some examples of situations where ERC is limited include:
1. Cannot be used for the same wages for PPP: If a business received a Paycheck Protection Program (PPP) loan, they could not use the same wages for PPP loan forgiveness and ERC purposes.
2. Cannot be used with other tax credits: Employers cannot claim both ERC and other tax credits, such as Work Opportunity Tax Credit (WOTC) or Research & Development Tax Credit, for the same employee.
3. Limited eligibility periods: The ERC is only available for wages paid after March 12, 2020, and before January 1, 2022.
4. Smaller credit amounts for larger businesses: Eligible employers with more than 500 full-time employees can only claim the credit on wages paid to employees not providing services due to a government order or experiencing a significant decline in gross receipts.
5. Must have a significant decline in gross receipts: Businesses must meet specific requirements related to gross receipts to qualify for the credit in Q3 or Q4 of 2022.
Businesses must understand these limitations when applying for ERC and ensure they meet all eligibility criteria before claiming the credit on their quarterly employment tax returns.
Other Tax Credits Available For Employers
Various tax credits are available for employers, including the Work Opportunity Tax Credit (WOTC), Employer-Provided Childcare Facilities and Services Credit, and the disabled access credit, among others.
Explanation Of Other Tax Credits Available
There are several other tax credits available that small to medium-sized business owners can take advantage of along with ERC:
1. Work Opportunity Tax Credit (WOTC): This tax credit is offered to employers who hire individuals from certain groups, such as veterans or government assistance.
2. Research and Development (R&D) Tax Credit: This tax credit incentivizes businesses that invest in research and development activities.
3. Family and Medical Leave Act (FMLA) Tax Credit: Employers who provide paid family and medical leave to their employees may be eligible for this tax credit.
4. Disabled Access Credit: Businesses that incur expenses related to making their establishments accessible to people with disabilities may be eligible for this credit.
5. Small Business Health Care Tax Credit: Small businesses that offer health insurance coverage to their employees may qualify for this tax credit.
Small business owners must consider all available tax credits and how they can work together to reduce overall tax liability. However, consulting with a qualified tax professional before taking action or making any tax decision is crucial.
Benefits Of Using Multiple Tax Credits Together
Small to Medium-Sized Business Owners can take advantage of various tax credits, such as the Employee Retention Credit (ERC) and the Payroll Protection Program (PPP).
Using multiple tax credits together can significantly save payroll taxes and operating costs.
Another example is combining the ERC with employer tax credits, such as the Work Opportunity Tax Credit or Qualified Small Business Payroll Tax Credit. This strategy can help maximize savings and reduce overall payroll expenses.
Furthermore, employers should be cautious when working with third-party providers who offer services related to claiming tax credits. Many of these providers charge high fees and make false promises about their ability to secure additional tax benefits.
How ERC Supports Small Business Sustainability
ERC supports small business sustainability by providing financial relief during unprecedented times, helping retain employees, and reducing overall payroll costs, which allows businesses to continue operating and contribute positively to the economy.
Examples Of How ERC Has Helped Small Businesses Survive
Small businesses have struggled during the COVID-19 pandemic, but the Employee Retention Credit (ERC) has helped many survive. Here are some examples:
1. A restaurant in California was struggling to keep its doors open due to reduced capacity and decreased revenue. By applying for and receiving the ERC, they were able to retain their employees and continue operating.
2. A retail store in Texas had to close temporarily due to local restrictions. They could use the ERC funds to pay their employees during the closure, which allowed them to reopen when restrictions eased.
3. A manufacturing company in New York experienced a significant decline in revenue during the pandemic but was still able to keep its employees on payroll thanks to the ERC.
4. A small law firm in Florida used the ERC funds to cover employee wages and other expenses, allowing them to stay afloat despite decreased clients.
5. An architecture firm in Massachusetts was able to retain its entire team and weather the economic downturn by taking advantage of the ERC.
These examples demonstrate how the ERC has financially relieved small businesses during uncertain times. Helping employers retain their staff has allowed businesses to stay open and continue providing services even amidst economic challenges.
Conclusion and Summary Answering Does Employee Retention Credit Reduce Wages Or Payroll Taxes?
In conclusion, the Employee Retention Credit (ERC) is a valuable tax credit that offers financial relief to eligible small businesses during unprecedented times of uncertainty.
As outlined, the ERC does not directly reduce employee wages or payroll taxes but can significantly reduce overall payroll costs and provide much-needed support for struggling employers.
While its use has limitations and restrictions, the benefits outweigh any drawbacks in most cases. Employers should take advantage of ERC qualifications and seek advice from trusted sources while cautiously approaching third-party providers.
Good news. There is still time to file! The employee retention tax credit can still be claimed retroactively and there is still time to file, even in 2023, 2024, and 2025 for the past tax years.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors™ can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program, without you having to pay an excessive percentage of your hard earned ERC refund.
DLA doesn’t charge a percent like many companies do. Our flat fee structure is fair and reasonable based on the amount of work involved. Keep More of Your Refund™
Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
- 941-X: 18b. Nonrefundable Portion of Credit for Qualified Sick and Family Leave Wages for Leave Taken After March 31, 2021, and Before October 1, 2021, Form Instructions (updated 2024) - May 1, 2024
- 941-X: 18a. Nonrefundable Portion of Employee Retention Credit, Form Instructions (2024 updates) - April 30, 2024
- 941-X: 17. Nonrefundable Portion of Credit for Qualified Sick and Family Leave Wages for Leave Taken After March 31, 2020, and Before April 1, 2021, Form Instructions (revised 2024) - April 29, 2024