Employee Retention Tax Credit (ERTC)

tax credit piggy bank and calculator

The Employee Retention Tax Credit (ERTC) aided employers during difficult times. The credit is part of the Coronavirus Aid, Relief, and Economic Security – (acronym CARES) Act and helped employers with the expenses of maintaining payroll for employees during the pandemic.

How The Employee Retention Tax Credit Works

The ERC is a refundable tax credit. This credit is equivalent to 50% of as much as $10,000 in wages paid to each employee. Eligible employers include those whose business operations were partially or fully suspended due to a governmental order or experienced a substantial drop in gross receipts during any quarter between March 12, 2020, and December 31, 2020.

The ERC is available to employers of any size, including nonprofits and self-employed individuals. However, employers must have experienced either a partial or complete suspension of business operations due to a governmental order or experienced a significant decline in gross receipts of more than 50% for the same quarter in 2019. In addition, employers must have maintained their workforce during the downturn to be eligible.

Available for quarters one and two in 2021, the ERC was made available to employers who paid employee wages, regardless of whether paid as cash wages, direct deposit to a bank account, or through other forms of compensation, such as employer contributions to health insurance or retirement plans.

The ERC offers business finance aid to S Corporations, small businesses, business owners, and employers. The Employee Retention Tax Credit helps offset the cost of employee retention during unpredictable operating conditions. It is important to note that the ERC is not a deduction but a credit against the employer’s payroll tax liability. Additionally, the ERC is available for federal and state payroll taxes, including Social Security and Medicare taxes.

Needed Details About The Paycheck Protection Program

The Paycheck Protection Program (PPP) is a federal government program that aided companies in surviving the COVID-19-related economic downturn. The Coronavirus Aid, Relief, and Economic Security or CARES Act established the program.

The PPP provides forgivable loans to small businesses if the funds cover payroll and other business-related expenses. These loans were made available to independent contractors, nonprofit organizations, and self-employed individuals adversely affected by the pandemic. It helped ensure businesses kept their employees on the payroll and opened their doors.

The repayment terms on PPP loans to small businesses are generally two years with an interest rate of 1%. Borrowers must make payments on their loans, but the Small Business Administration (SBA) will forgive the loan if specific criteria. To qualify for loan forgiveness, borrowers must use at least 60% of the loan proceeds for payroll and the remaining 40% for eligible non-payroll expenses.

Total loan forgiveness amounts could get affected in these situations:

  • If the borrower cuts back the number of full-time employees
  • If the borrower reduces employee salaries and wages by more than 25%.

If you received federal money from the PPP, but they did not approve a payment waiver, you will still be required to repay the loan according to the repayment terms specified in the loan agreement.

PPP loan recipients can request a deferment or forbearance if unable to make the payments. But since this loan is forgivable, using the funds for eligible expenses is the best way to maximize loan forgiveness.

For employers who have taken on PPP loans and are getting employee retention tax credits, working with a payroll company, tax professionals, and legal counsel who understand your company’s needs, including your human resources department, is advantageous to your bottom line.

Professional Counsel Offers Solutions

Professional counsel of all sorts, including tax professionals, legal advisors, and financial advisors, helps business owners cover their bases by providing advice and solutions to help manage the risks of running a business. Trusted advisors help to identify potential threats, assess the potential impact of those risks, and develop strategies to mitigate them.