A business advertises employees after coronavirus disease (COVID-19) restrictions are lifted in Santa Monica, California on June 22, 2021.
Lucy Nicholson | Reuters
Small businesses across the country are struggling to retain and recruit new employees in a tight labor market that has given workers the upper hand. Friday’s most recent outside-farm payroll report showed the setting remains hot, with a better-than-expected exp 850,000 jobs added in June by employers, and wages are ticking higher again.
Companies are forced to offer their employees higher wages and benefits and benefit from a booming economy after Covid. And they compete locally with a number of large corporations in the US who are raising wages and offering tempting bonuses. Amazon Offers a $ 1,000 sign up bonus for some warehouse jobs; MC Donalds raised his minimum wage in May and is now offering $ 400 and $ 500 bonuses on certain positions; Chipotle offers an average wage of $ 15 an hour and a $ 200 referral bonus for existing employees.
This talent war has been tough for small businesses still trying to recover from losses during the coronavirus pandemic. However, many have the right to get money back from the government by adding it to the income tax they paid. Small and medium-sized businesses can get cash direct from the federal government through the Employee Retention Credit (ERC), which reimburses businesses based on a percentage of the wages paid to their employees.
Many entrepreneurs are already taking advantage of the benefits. “This helps them offset wages, wage increases, as well as part of the salary for new employees they hire.” Paychex CEO Marty Mucci said Jim Cramer on CNBC’s “Mad Money” last Tuesday. “We have already processed over $ 3 billion in tax credits, which is cash in your pocket, to help you out immediately.”
Still, many small businesses are unaware of it.
“One of the key programs that was largely unknown is the employee withholding tax credit,” said Sarah Crozier, spokeswoman for the Main Street Alliance, a small business advocacy group. “A lot of people think that a tax credit will be refunded later, but it’s paid up front.”
The ERC started with the federal government’s first economic Covid bailout package and was recently expanded to allow companies to reclaim more money from the wages they paid their employees in 2020 and 2021. Businesses can receive cash for wages paid through the end of 2021 and retroactive payments for wages in 2020.
Eligible companies can claim back up to 70% of wages paid to employees up to $ 10,000 or a maximum of $ 7,000 per employee for each quarter of the calendar year. It adds up to a potential total of $ 28,000 in cashback per employee per year.
The Employee Loyalty Credit is aimed at small and medium-sized businesses as you currently need to have 500 employees or fewer to be eligible. Beyond the employee threshold, companies currently have to see a 20% reduction in gross income in a quarter of 2021 compared to the same quarter of 2019 in the quarters for which they claim the ERC. The CARES Act 2020 legislation required gross income in a calendar quarter of less than 50% of gross income compared to the same calendar quarter in 2019 in order to qualify.
For an employer who has already paid taxes in 2020, the ERC can reduce its total liability and the retrospectively claimed money. To get ERC money back in the form of a refund of taxes already paid, companies must fill out a prepayment form or Form 7200 with the Treasury Department’s Internal Revenue System, or they can do it through a payroll company like Paychex.
“A lot of these companies have short cash flow runways and it’s really important to get as much cash now as you get refunded later in the year,” said Crozier.
The credit can be a cash refund up to a maximum of $ 7,000 per employee per quarter in 2021 (up to 50% credit in 2020 of a maximum of $ 10,000 per employee per year). Start-ups that were founded after February 15, 2020 and were forced to close can be granted a higher loan.
For an ongoing payroll period, it can reduce liability per employee and the amount of wage tax that would otherwise have been paid, including federal income tax, social security, and Medicare taxes.
The specific quarter a company claims the loan for makes a big difference, making 2020 the year more labor costs are likely to be eligible, said Tony Nitti, a partner in the tax advisory group at RubinBrown. That’s because the business is much better in 2021 than it is in 2020, so the constraint on the decline in gross earnings from 2019 may no longer be met. Nitti said companies need to keep an eye on the requirements and focus on only claiming the ERC money for the quarters that they meet those requirements.
Wages count towards this cashback incentive only if they are incurred on FICA tax, or US federal income tax, and wages paid to a business owner’s relatives are ineligible. Though money is used to set bonuses to compete with the likes of the competition? Amazon and MC Donalds can be counted as an eligible wage for the ERC.
This enables small businesses to compete with national firms in setting bonuses and wages.
The first economic aid package allowed companies receiving loans from the Paycheck Protection Program not to use the ERC, but now they can exclude the PPP loan, which is used to pay wages and, more importantly have not applied for PPP loan waiver. In fact, employers have a choice between applying for PPL loan waiver or ERC. If they request forgiveness and are rejected, they can still apply for the ERC afterwards. In addition, any wages not paid from PPP loan funds will still be eligible for the ERC.