A store advertises to employees, after restrictions on the coronavirus disease (COVID-19) were lifted, in Santa Monica, California, June 22, 2021.
Lucy Nicholson | Reuters
Small businesses across the country are struggling to retain employees and attract new hires in a tight labor market that has given workers the upper hand. Friday’s latest nonfarm payroll report showed the workforce remains popular, with a better-than-expected 850,000 jobs added by employers in June and wages ticking higher again.
Companies are being forced to offer higher wages and benefits to staff and take advantage of a booming economy after Covid. And they compete locally with a slew of large companies in the US who have raised wages and offered attractive bonuses. Amazon offers a $1,000 sign-up bonus for some warehouse jobs; McDonald’s raised its minimum wage in May and now offers $400 and $500 bonuses for certain positions; Chipotle offers an average pay of $15 per hour and a $200 referral bonus for existing employees.
That war for talent has been tough on small businesses that are still recovering from losses amid the coronavirus pandemic. But many have the right to get money back from the government through a credit on the payroll taxes they pay. Small and medium businesses can get cash directly from the federal government through the Employee Retention Credit (ERC), which gives companies cash back on a percentage of wages paid to their employees.
Many entrepreneurs are already using this. “This helps them offset the wages, raises and some of the pay for new employees they bring in,” Paychex CEO Marty Mucci told Jim Cramer on The Washington City Times’s “Mad Money” last Tuesday. processed more than $3 billion in employee retention tax credits, which is cash in their pocket to help them now.”
Yet many small businesses don’t know about it.
“One of the most important programs that has been largely unknown is the employee withholding tax credit,” said Sarah Crozier, spokeswoman for the Main Street Alliance, a small business advocacy group. “Many people see a tax credit as a refund that comes later, but this is prepaid.”
How the tax relief works
The ERC started with the first federal economic aid package for Covid, and it has recently expanded to allow companies to recover more money from wages they paid to workers in 2020 and 2021. Companies can receive money for wages paid until the end of 2021 and retroactively for 2020 wages.
Eligible companies can recover up to 70% of up to $10,000 in wages paid to employees, or a maximum amount of $7,000 per employee for any quarter of the calendar year. It works out to a potential total of $28,000 in cash per year per employee.
The employee retention credit is aimed at small and medium-sized businesses because you currently need 500 employees or less to qualify. On top of the employee threshold, companies should currently see a 20% reduction in gross revenue in a quarter of 2021 compared to the same quarter in 2019, or if they did not see this reduction, businesses would have to be partially or completely closed by the government during the quarters for which they claim the ERC. The 2020 CARES Act legislation required gross earnings in a calendar quarter to be less than 50% of gross earnings compared to the same calendar quarter in 2019 to qualify.
How to File an IRS Claim?
For an employer who has already paid taxes in 2020, the ERC can retroactively reduce their total liability and the monies claimed. To get the ERC money back in the form of a refund of taxes already paid, companies must complete an advance form, or Form 7200, with the Department of Treasury’s Internal Revenue System, or they can process it through a payroll company such as Paychex.
“A lot of these companies have short cash flow jobs and it’s very important to get as much money as possible now rather than being paid back later in the year,” Crozier said.
The credit can go up to a cash repayment of $7,000 per employee, per quarter in 2021 (in 2020, it was a credit of up to 50% of a maximum of $10,000 per employee, per year). Start-ups founded after February 15, 2020 and forced to close may receive greater credit.
For a current pay period, it can reduce liability per employee and the amount of labor taxes that would otherwise have been paid, including federal income taxes, Social Security and Medicare taxes.
The specific quarter for which a company is claiming the credit — companies typically file labor taxes quarterly — makes a big difference and makes 2020 the year when more labor costs are likely to qualify, said Tony Nitti, a tax group partner at RubinBrown. That’s because things are much better in 2021 than in 2020, so the qualifier regarding the decline in gross revenues from 2019 may no longer be met. Nitti said companies should keep the requirements in mind and focus on claiming the ERC money only for the quarters in which they qualify.
Counting paid wages?
Wages count toward this cashback incentive only if they apply to the FICA tax, the U.S. federal payroll tax, and wages paid to family members of a business owner are ineligible. Although money used for hiring bonuses to compete with companies like Amazon and McDonald’s can count as eligible wages for the ERC.
The first economic aid package did not allow companies that received loans from the Paycheck Protection Program to claim the ERC, but now, as long as they exclude PPP loans used to pay wages, and most importantly, they cannot waive PPP loans. applied for loans. In fact, employers have a choice of whether to request forgiveness for the PPL loan or ERC. If they ask for forgiveness and are rejected, they can still apply for the ERC after that. In addition, any wages outside the PPP loan funds are still eligible for the ERC.