You’ve probably seen or heard the ad or received one of the many phone calls, emails, or texts that claim the government is owed you $26,000 for every employee your company has. While this sounds too good to be true, it isn’t. That is why every business owner should have an idea of what is the employee retention credit.
The ERC is a refundable tax credit that was put into place by the Coronavirus Aid, Relief and Economic Security Act in March 2020. It rewards companies that kept paying employees through a significant decline in gross receipts or mandated shutdowns and suspensions of business operations.
Table of Contents
Increased Cash Flow
Increased profits are a great goal, but they only happen when your company has enough cash to pay for necessary business expenses. That’s why it is so essential to understand the difference between profit and cash flow and to focus on achieving positive cash flow. One way to improve your cash flow is to take advantage of government relief programs like the Employee Retention Credit (ERC). Congress passed the ERC during the COVID-19 pandemic to help businesses that lost money because of a partial suspension of operations or a decline in gross receipts.
The IRS allows businesses to claim the credit by reducing their payroll tax deposits and reconciling them on quarterly Form 941. Employers can also apply for advance payments of the credit using Form 7200. However, claiming the credit can be complicated, especially for small business owners who need to become more familiar with federal tax regulations and deadlines. Working with a qualified tax preparer specializing in the Employee Retention Credit is highly recommended to avoid mistakes.
Reduced Payroll Taxes
A reduction in payroll taxes is a cash flow boost for businesses. By lowering their liability, they have more money to pay bills and can save on taxes for future quarters. This tax relief was introduced as part of the CARES Act and is a dollar-for-dollar credit against an employer’s federal employment taxes. Business owners need to be aware of this refundable credit, so they can take advantage of it if they are eligible.
The Employee Retention Credit is a great way to help keep your team working during these times, and it’s important to file it correctly to avoid any penalties. If you have questions about filing the ERC, our expert team is here to assist. A lowered payroll tax rate increases cash flow and stimulates the economy. It also shifts the burden of paying for social security from workers to employers. This policy is expected to boost employment by reducing the cost of hiring and keeping employees. Still, other factors, such as downward wage rigidity, could prevent a full pass-through of this policy. Eligible businesses can claim the Employee Retention Credit by reducing their quarterly federal employment tax deposits and reconciling them on Form 941. If a business cannot claim the credit by adjusting their previous returns, they can apply for an advance payment using Form 941-X.
Increased Employee Satisfaction
People who feel connected to their work will more likely stay loyal to a company. Ultimately, this can help businesses save money because they will have to spend less on recruiting and training new employees.
Many factors influence job satisfaction, including competitive pay and benefits, a positive working environment, and the ability to develop within the company. One of the best ways to determine if your team members are satisfied is by providing regular feedback through surveys or questionnaires. This can also give you a clear understanding of necessary changes.
Employees will be more satisfied if they are provided with a clear path for career growth, whether by allowing them to take classes outside the office, offering tuition reimbursement, or promoting them to a higher-level position. This will allow them to feel that they are working towards a goal, which will keep them satisfied for longer and inspire them to spread the word about your company.
Although trying to motivate workers through financial incentives like bonuses can be tempting, a more practical approach is through one-on-one meetings, 360 feedback, and employee recognition. These methods will help you get the most out of your team without creating a stressful workplace that leads to turnover, which can cost your business lost productivity and higher operating costs than necessary.
Increased Profits
Taking advantage of the ERC can save businesses a sizable sum in payroll taxes. If the credit is larger than an employer’s total tax liability, it will be refunded to the company. However, it’s important to understand how the ERC works and how qualified wages are calculated. For example, business owners need to know that the credit only applies to wages paid to employees of a company that are not more than 50% owned by the person claiming the credit. The IRS recently issued Notice 2021-49 that provides new information on the ERC and explicitly addresses whether majority owners’ earnings qualify as qualifying wages for the credit. The answer is no in most instances due to family attribution rules.
Fortunately, some services can help business owners calculate their eligible wages for the ERC and ensure they meet all the required deadlines. These companies can also assist with filing the credit to ensure it’s being claimed correctly. Working with these specialists can make a big difference in the money a company receives from the government. This is especially helpful to small businesses needing more internal resources to make this happen. Many of these companies charge a fee for their services, but it is generally less than what a company would spend on an accountant or bookkeeper to calculate the credit themselves.
