Introduction
ERC, or Employee Retention Credit, has become a perfect incentive for small businesses. But it works only when the credits become part of the employers’ cash flow. The good news is that there is more than one way to monetize the ERC.
In fact, the federal government offers businesses four unique ways to become eligible and reap the benefits of Employee Retention Credit. President Biden’s administration continues to encourage the most hard-hit small businesses to leverage a major tax break like the Employee Retention Credit.
Since the roll out of this tax break in 2020, it has expanded into a viable relief package. According to the White House report, over 30,000 small entities have managed to claim over $1 billion in credit. The federal government continues to raise more awareness and practical guidance about the plan.
How Does this Credit Work?
The Employee Retention Credit provides qualified employers with a 50% refundable tax credit on more than $10,000 for paid salary per employee. As long as a business is eligible, it can receive a tax credit of more than $5,000 for each employee.
It all started when the American Rescue Plan Act was signed to expand the current employee retention credits. With this expansion, more businesses can now qualify to claim their tax credits until 2024 and 2025. Eligible businesses can cut out over 80% of the paid wages per employee in each quarter.
Potential credits for an entire year can total up to $28,000 per employee. From the perspective of small businesses, it is a major bonus, and employers are at the forefront to take advantage of it. On top of using this tax credit to reduce the employment taxes you pay, companies with 500 or fewer employees can ask for the credit advance payment from the IRS and receive cash.
But it is based on whether or not that company’s credit is higher than what they owe on their employment taxes. With this tax credit, different types of businesses can reduce their payroll deposits significantly. The key is to put your business in a situation to get a refund from the government.
Eligibility Criteria for ERC
Employers have to navigate strict eligibility requirements to claim and receive employment retention credit. In fact, this credit is designed to cater to businesses that were hit the hardest during the pandemic and have a genuine shot at recovering and driving growth in the coming years.
When it comes to 2020 ERC, employers that recorded 50% of quarterly loss or decline are leading the line to get this credit. There’s also an expansion of rules for this credit in 2021. It means businesses that experienced partial or complete shutdown and lost 20% of quarterly revenue or gross receipts can benefit from this claim.
In some aspects, the 2021 numbers were off the charts more than 2020, and businesses had to seek more credits to recoup business losses. But it also makes this credit initiative more complex and requires businesses to follow the conventional process to take advantage of the tax credit. Many businesses that received PPP loans can enjoy the same perks in the 2021 employee tax credit.
Best Ways to Monetize the Employment Retention Credit
If you’re confused about how to get employee retention credit, understand you’re not alone. A multitude of businesses often wonder and question how to monetize employee retention credit. Many employers are still learning the process to qualify and file a claim for Employee Retention Credit.
When it comes to the monetization of tax credits, the trick is to focus on maximizing Employee Retention Credits. To calculate employee retention credits, align wages from PPP grants and loans. It can be paid family leave, sick leave, WOTC or Work Opportunity Tax Credit, or research and development credits.
Businesses can also maximize employee retention credit by assigning PPP funds among workers’ wages that wouldn’t lead to ERC. Employers can take a sigh of relief in knowing that they can file their 2020 ERCs until 2024. Employers also have ample time to file 2021 ERCs until 2025. For qualified paid wages in 2020-21, employers can file their ERCs with the 941-X form.
Contrary to what employers may have heard, it is not too late to leverage employment retention credits (ERCs). But businesses will have to be patient since there is a waiting period. On average, the IRS can take over nine months to issue refund claims. Once an employer gets the refund, the business can credit to the compensation expense account and debit the payroll tax liability.
Now, let’s take a look at available options for companies to monetize Employment Retention Credit:
- A Quarterly Tax Benefit
An eligible business can calculate its entitled credit amount by considering employees’ gross wages and accounting for unused healthcare costs. But the requirement is to do this before you claim a credit. Employers can use Form 941 to claim the credit.
With Form 941, businesses can decide whether to receive a refund on overpayment or request a refund in the form of credit based on quarterly paid employee taxes. However, if an employer claims overpayment as a credit on the second quarter of employment tax returns – the business can cut out payroll tax deposits that they ordinarily would’ve made.
- An Immediate Tax Credit
The fastest approach to monetize employment retention credit is to cut back on payroll tax deposits. Once you reduce these deposits, the employer can earn the credit on paid wages. In this case, the employer can also claim this earning as an advance credit.
Technically, employee wage is based on employment withholding tax and federal income that is ordinarily deposited via the Electronic Funds Tax Payment System (EFTPS). Businesses can use Form 941 to reconcile their quarterly payroll tax liability.
Remember that the deposits you make translate into claimed credits. Consider that while employee retention credit is refundable on paid wages that offset the employer’s Medicare taxes and Social Security, the actual offset can involve all taxes that the business ordinarily would deposit.
- An Advance Tax Credit
Employers can use Form 941 to figure out the taxes they owe. The idea is to reconcile the payroll tax liability of the employer and make deposits for claims. By the end of a quarter, employers are often required to pay the amount again to the federal government. Eligible small businesses can avail the perks of ERC long before paying wages and get an advanced tax credit.
All small businesses need to do is file a claim for a tax credit based on their average paid quarterly wages in 2020-21. The average quarterly wages of an employer depend on the social security salary of the business without considering the base wage. Ultimately, businesses can collectively determine their average quarterly salaries.
- Adjusted Employment Tax Return
When a business files Form 941 for a specific quarter calendar, the employer doesn’t have to rush and has three years before filing Form 941 to claim adjusted credit. In this scenario, employers need to file Form 941-X before the refund expires statute of limitations for a specific year’s employment tax returns.
Typically, the quarterly statute of limitations in Form 941 expires. Understand that this expiration indicates the absence of an agreement by the IRS and the taxpayer within three years. According to the 2021 American Rescue Plan, the time window is extended to five years to get claimed credits on paid wages for employers.
Wrapping Up
Before you leverage Employee Retention Credit, perform a thorough assessment to determine your eligibility and review the findings based on your employees, company size, and revenue stream. In the grand scheme of things, ERC can help companies get tax credits worth thousands of dollars.
This should be the hook for companies to better understand ERC eligibility requirements and how ERC can help them sustain business growth. Employers should also consider factors that might make them competitively, environmentally, and economically vulnerable.
Run a thorough analysis of your company and bring legal, accounting, human resources, and regulatory compliance experts together to get the full picture. Once you recognize financial underpinnings, you can opt for a stable and growth-driven position.
The immediate benefit monetization option probably makes more sense to most employers. But some companies may gravitate towards an adjusted employment tax return or an advanced credit. Whether it’s a quarterly benefit or an immediate benefit, businesses should take their time to review these options and implement the one that works in their favor.
REFERENCES:
- https://kirschcpa.com/accounting-services-blog/employee-retention-credit-erc/
- https://www.cnbc.com/2021/05/12/biden-is-encouraging-eligible-businesses-to-take-advantage-of-this-big-tax-break.html
- https://erctoday.com/employee-retention-tax-credit-can-be-filed-in-2022/
- https://www.boynecapital.com/perspective-employee-retention-creditsare-you-leaving-money-on-the-table/
- https://lgresources.com/businesses-can-do-erc-money/
- https://kruzeconsulting.com/recovery-startup-business-employee-retention-tax-credit-erc/
