Introduction to ERC Claims in 2024
In the competitive and saturated job marketplace, small businesses have no choice but to raise standard wages and offer significant bonuses to get the best employees. But in the quest to compete for top workers, the labor market has become more complex. On the bright side, businesses received billions in cash from the government as a way to offset total recruitment costs.
The legislation was put in place in 2021 to support small and medium-sized businesses. Since 2020, the idea is to help business owners recover labor costs via ERC or Employee Retention Credit. With this tax credit initiative, companies were able to cover over $7,000 per quarter for each worker. The timeframe of this initiative was from the start of the pandemic to quarter four of 2021.
But even throughout 2022, businesses are struggling to meet hiring needs. In 2023, it has become clear that it will take some time before the rapid hiring trend slows down. Conversely, in the tech space tech giants like Amazon, Google, and Microsoft continue to lay off thousands of employees, which paints a different picture and doesn’t encapsulate the hiring needs of the usual small businesses.
Market Changes – Employee Retention Credit
There were more than 850,000 jobs added to the market last year with increased wages and bonuses. While government support is good news for small businesses to recoup some or all hiring cost, the burden of responsibility still falls on businesses to retain their most talented employees. After all, attaining and retaining talented employees is one of the elements that helps companies of all sizes drive growth and scale up operations over time.
Increase in Salaries and Bonuses
In 2020-21, small businesses were propelled to compete locally and against major corporations in the U.S. It was only a matter of time before employees we’re given a significant uptick in salaries and bonuses. At the time, Amazon offered a $1,000 sign-on bonus related to warehouse jobs. In a new turn of events, even McDonald’s increased its minimum wage and decided to offer $400-500 bonuses for specific positions.
And that’s how 2021-22 became a talent war and made it more difficult for small businesses to fill out key positions and recover losses. In hindsight, most of these entities deserve a shot to get their funds back from the federal government via a credit stacked against the employment taxes.
With ERC, small and mid-range businesses could get cash straight from the federal government. The idea was to help these businesses recover a percentage of their money from paying salaries to their workers.
Not Every Business Took Advantage of ERC
While many business owners managed to leverage the ERC, it didn’t work out for several businesses. Remember that when small businesses employees new people, they can cover some of the funds for bringing in new workers into the mix. By Q3 of 2022, over $3 billion of retention tax credits were used.
It means this cash became available to businesses to recover their hiring costs and maintain business growth. What’s odd is that many small entities didn’t even know about PPP loan funds and could not maintain their employee retention rate.
The employee retention tax credit is one of the top programs that most small businesses, at the time, were unaware of. Small business advocates highlight that people usually see a tax credit through the lens of reimbursement. However unlike traditional tax credits, this directs upfront payment.
Basics of Tax Credit – ERC 101
The mechanics of the employee retention tax credit are straightforward and not as technical as many businesses have come to believe. HR professionals and market experts believe that the expansion of Employee Retention Credit was inevitable. It may have started out as a federal relief package amidst the peak COVID-19 period, but now it can help businesses expand and leverage new opportunities.
In ERC, it all came down to “when” and “how” businesses claim money on their paid wages to employees. Companies received money for paid salaries and retroactive payments in 2020-21. But in 2022, the discourse and process around PPP and ERC became more complicated and a lot of naive misconceptions started to take the spotlight. ERC caters to small and mid-range businesses with 500 or fewer employees. Apart from the number of employees, businesses should have at least a 20% reduced gross profit in at least one 2021 quarter than 2019.
Counting Paid Salaries for ERC
The standard of counting wages works around cash incentive that applies to the U.S. FICA tax and covers payroll tax and paid wages. However, it doesn’t cover paid wages or payroll taxes associated with a business owner or stakeholder’s relatives. So, what is an eligible salary for the ERC? It can be the hiring money and bonuses used by businesses to compete with giants like Google, McDonald’s, Amazon, etc.
What most people don’t realize is that the first government-based economic relief program didn’t allow companies to get PPP loans to claim the ERC. Of course, small businesses were eventually able to tap into PPP loans to avail Employee Retention Credit.
One of the main requirements was that if businesses don’t use PPP loan funds to pay employee wages – they won’t be able to apply and get ERC or PPP loan forgiveness. But businesses that applied for loan forgiveness and faced rejection could still apply for Employee Retention Credit. In fact, any paid wages apart from the PPP loan money qualifies for the ERC.
What Happened Next?
In 2022, economists affirm that out of $800 billion in PPP loans, less than 35% went to employees. So, what happened to the rest of the loan money? Well, the report finds that the company shareholders and owners got their hands on it. In fact, the workers didn’t receive most of the $800 billion loan money passed on via the government’s PPP or Paycheck Protection Program. Instead, it was used to support business owners.
Non-Transparent Distribution of Funds
At the National Bureau of Economic Research, a published study by renowned economists affirms that most of the PPP loans handed out as one of the first disbursements in 2022 were not utilized to recover employee paychecks.
The numbers check out, and the primary findings are put forth in motion by payroll management agencies. In total, estimates show that only 23%-34% of entire PPP funds went to employees on the brink of losing their jobs. And three-fourths and two-thirds of the PPP loan money went to company shareholders and owners.
How Much Companies Were Able to Save?
According to estimations, the program couldn’t preserve 2-3 million employees’ job years. It means the underlying impact of PPP loans on job loss was relatively high. On average, however, PPP loans helped companies save $170,000 to $255,000 on every job. It is also the average disbursed amount by the federal government.
Interestingly, over 90% of entities that applied to get a PPP loan received it. But one of the fundamental criteria of loan forgiveness was to retain employees. Specifically, the capped payroll expenses should be $100,000 per employee to tap into loan forgiveness. It shows that the majority of the PPP loan share went to company shareholders and owners.
ERC Prerequisite Requirements
Since the roll out of PPP loans and companies becoming eligible to leverage ERC payroll tax, it has been a bumpy ride. While receiving funds for ERC was appealing to businesses, there were obstacles and prerequisite requirements that companies needed to meet.
In general, there was also confusion around how businesses can receive money for employee payroll tax. But in time, more and more businesses started to understand the requirements of PPP loan funds and mechanics around employment retention tax credits.
Final Thoughts – Can Your Business Claim ERC?
In PPP and ERC, the main issue was the regressive distribution of loan funds. And that’s because there was an overwhelming accumulated income involved. The research shows that over 70% of the funds went to the top one-fifth of income holders. But statistically, this group represents 35% of the total earnings. Unlike the ERC program, the distribution of pandemic initiatives such as stimulus checks and unemployment insurance was equitable.
Most studies also highlight that there is a high degree of fraud attached to PPP loan funds. In fact, some stories took the media’s attention and made headlines. In August 2022, an academic paper showed that over 15% of PPP money was used for fraudulent activities.
On the other hand, it was ironic that the program’s best feature was exploited to make it less accessible and viable for businesses. At its core, the PPP was not fully realized and targeted as it should be in 2021-22. Experts attest that a good chunk of PPP loan funds went to companies that ordinarily would’ve achieved growth and retained employees even without PPP.
