So now I’m going to talk about the Employee Retention Credit, or ERC for short. The purpose of this section is to highlight some of the difficulties involved in administering this credit, and how the Equifax ERC works in comparison to a few other federal credits.
First, I want to briefly talk about two of the problems associated with the ERC that I found in our own research:
Challenge 1: How Do I Qualify?
This can be an issue for employers, as you may need to explain to your employees who are under age 50 how they qualify for the credit.
Challenge 2: How Do I Apply for the Credit?
To apply for the credit, you have to determine how many hours you work for your employee each year (in 12-month increments). You then calculate how many hours of labor you would have to provide for each employee to reach the minimum threshold, which is set to $23,660 per person per year. Once you determine the number of hours you are required to provide, you can then apply for the credit.
Challenge 3: Will I Use it All?
This is a key question, because to utilize the credit, an employer must spend a certain amount of their pre-tax income on benefit payments. This is defined as 50% of the first $6,000 in qualified benefit payments, and 100% of the next $8,000. For example, if you provide $3,000 per year for benefits, you must pay $3,000 of that $3,000 in the first year, and then pay $8,000 per year after that.
Challenge 4: Can I Also Use the Credit if I’m Not an Employer?
The ERC is only applicable to employers that provide benefits to employees. If you’re an individual, you cannot apply for the credit. However, there is a provision that allows you to create a super-employee, who can qualify for the credit if you own the business. You would then be able to apply for this credit if you have an individual that is 40 hours per week or more and works over 16 hours per week.
Challenge 5: How Am I Eligible for the Credit?
You must provide qualified benefits to your employees through the ERC, but you can actually qualify for the credit if your employee qualifies for a federal or state wage credit. For example, if an employee qualifies for the federal minimum wage credit of $7.25 per hour, you can apply for the ERC to offset the value of the federal minimum wage credit.
Challenge 6: How Can I Apply for the Credit?
The ERC is administered through the IRS. If you’re currently collecting Social Security, you’ll want to make sure that you’re enrolled in the payroll tax process. If you’re not, you’ll need to contact the IRS to receive and file an application. There’s online application process, but there are more than a few good resources out there that will walk you through the entire process for your particular situation. You’ll need to know the Employer Identification Number for your business, and you’ll also need to give the IRS tax information, which will need to be matched up with your IRS data base.
The typical process for applying for the ERC, which can take up to 90 days to complete, is:
Identify your employee(s) Set the amount of the ERC (I would go with 40 hours per year if you’re an employer). Open and file a complete application. Send copies of the application, verification documents, and proof of deposit for the first $6,000 of your credit. For those of you interested in more information, the IRS has an extensive amount of guidance that’s available online for you to utilize.
Misconceptions About the ERC
Although I wouldn’t recommend that you avoid the credit, it is a complicated subject. In addition to the math to determine how many hours you must provide, there are several misconceptions about the ERC that will need to be addressed.
Myths About the ERC
I don’t think there is one specific misconception about the ERC that you should be aware of, but these are some of the most commonly found myths about this benefit.
Myth #1: The ERC only applies to large employers
I know this one is a bit of a stretch, but in my experience, many employers are surprised to learn that the ERC doesn’t apply to large employers. That means that if your organization is comprised of fewer than 50 employees, you should be able to take advantage of the ERC if you follow the rules.
Myth #2: The ERC is only applicable to individual workers
Perhaps the biggest misconception about the ERC is that it only applies to individuals. Many employers make the mistake of believing that the ERC only applies to individuals that are eligible for a federal or state wage credit. If that’s your assumption, then you’re in for a big surprise. The truth is that the ERC applies to all employees, and you have to consider an additional 7.65 hours of work per week, per employee.
The Solution
So now that you know that you do in fact have an eligible payroll credit, it’s time to take action. If you’re going to apply for the ERC, the IRS suggests using one of the income tax prep services that have been developed specifically to make the ERC application process easier. The IRS also advises using ERC CASH Application Software for their application process. You can download the free basic version of ERC software from the IRS.
Those tools are just the beginning. Some businesses have opted for fully loaded software that handles everything from banking to forms to time tracking, accounting, and everything else that the software company has to offer. There are a lot of options available for small businesses, and if you’re going to do this for the first time, you’re likely to find the one that’s perfect for you.
Myth #3: You need to provide your employees with the direct deposit option for the ERC
I mentioned earlier that there are more than a few good options available for small businesses to do the application. Not every business is well-equipped to handle the complicated tax forms that make up the ERC application. As a result, many choose to pay their employees the maximum federal rate for the first year, but then apply the credit directly to the payroll of those employees for the following years.
That’s because doing the ERC calculation on a percentage of wages will cause the IRS to count the employee’s time and then the time for the employer separately. And if the employer is paying the employee more than the employer is getting paid, the tax credit is doubled. So paying the full federal rate for the first year may be your best option, but don’t be surprised if you do end up having to file the ERC on a percentage of wages.
Myth #4: The ERC is limited to 12 months a year
I know, it seems like a catch 22, but it’s really not. The ERC does not have a 12-month limit, but it can be applied for up to 12 months in a calendar year. The exception is that if your company’s income is under a certain threshold, you will need to file a new Form SS-8 every 12 months. That includes businesses that are paying wages up to $20,000 a year.
The Solution
If you have any questions or concerns about the ERC, call the IRS. They’re always happy to help. The ERC is really a terrific benefit, so if you want to get the most benefit from it, then it would behoove you to get help from an ERC expert. And remember: Don’t wait until April 15, but rather, get moving on the ERC now.
Mistaken Disclosure
There is a glitch in the ERC system. If you use a direct deposit system, the tax return processing must be in by February 28 of the following year. That’s why you see so many small businesses find out that they’re ERC eligible only after April 1. So if you find out your company is eligible for the ERC after April 1, you have time to take action. As a result, you can include the ERC on the tax form for the first year. But then you need to apply the ERC on a percentage of wages on the second year return. And that’s something to think about before you decide whether to do it the first year.
Myth #5: It’s good to give the ERC to a friend or relative who works for you
Well, yes and no. Yes, it would be good to give the ERC to your friend or relative who works for you, but it’s a bad idea to include the ERC on the tax form for the first year. As I mentioned earlier, the ERC computation will count the employee’s time and then the time for the employer separately. But if the employee is paid more than the employer is getting paid, the tax credit is doubled. So paying the full federal rate for the first year may be your best option, but don’t be surprised if you do end up having to file the ERC on a percentage of wages.
The Solution
If you find out you’re eligible for the ERC after April 1, then you have time to take action. So take some time and think about the best way to take advantage of this great tax incentive. In a perfect world, I’d suggest that you give the ERC to your friend or relative, but give it a couple of months to make sure the tax deduction will be enough. After you give it to him or her, consider the fact that you’re assuming that your friend will not be making any changes in his or her tax withholding, so there’s a real risk that you’ll end up having to file the ERC. And that’s why you really need to make sure the tax deduction is enough.
It’s a Nice Factor
As I mentioned earlier, the ERC will allow your company to deduct 40 percent of wages paid to employees making more than $16,000 per year. But that does not mean you must use the ERC to pay wages up to $16,000 per year. If you want to take advantage of the ERC, then your figure for the employee compensation must be no more than the 25th percentile of your wage earners. That’s defined as the amount of wages paid to an employee that’s 1/50th of what the average wage earner in your company is paid. For example, if you have 75 employees and the average wage earner is making $12 an hour, then the amount of wages you pay must be no more than $12.50 per hour for the purpose of qualifying for the ERC. So you can use the ERC to pay wages up to $12,500 for the first year, but then use the ERC on a percentage of wages if you make more than $16,000 per year.
The average wage earner in your company is probably not making $12 an hour, so it’s good to make sure that the percentage of wages used for ERC purposes is the average. And it’s good to check with your payroll department, because they may be able to provide you with more precise data. Or, if you have other employees who work under you and your payroll department says that their wages are less than $16,000 a year, then the percentage of wages you use can also be higher. So make sure you check it out and get as much information as you can. The ERC is a great addition to the payroll tax break, so you should probably take advantage of it when it is offered.
Even if your company uses the ERC, you can still use it to reduce your payroll tax bill, and you can also use it to reduce your FICA taxes as well. So if you do it correctly, you’ll lower your taxes and your FICA payments in both April and June of next year. And if you do it incorrectly, you’ll only reduce your taxes temporarily, which will mean that you’ll be forced to pay penalties. And even if you have an employee who works in excess of $16,000 per year, there’s still a lot of room for you to qualify for the ERC. Even if your average wage earner only makes $12,500 a year, you can still use the ERC on a percentage of $12,500 or less in wages.
The ERC Is something that you should take advantage of, but you do have to be careful when you do so. So talk to your payroll department and your accountant to see if the ERC will work for your company, because if you don’t use it, you’ll end up being penalized when you file your 2016 return. But if you use the ERC properly and take advantage of it in a smart way, you’ll end up saving a lot of money next April. And for more on payroll tax breaks, check out this post from beginning.
Myth 6: Tax Extenders
The final tax break on this list is the Tax Extenders, which are a bunch of tax breaks that expire at the end of the year. When you work with taxes, it can be hard to keep track of the hundreds of tax breaks that exist for various purposes. And if you make too many mistakes, you could end up costing yourself a lot of money.
However, the Tax Extenders are the perfect solution to that problem, and you can use the Tax Extenders to write off a bunch of expenses that you’d normally have to write off at the end of the year. You can take advantage of many of these tax breaks to write off any expenses that you pay each year. For example, you can deduct your home office furniture expenses, as well as any expenses that you pay for employee benefits.
And because the Tax Extenders don’t have expiration dates, you can use them to reduce your tax liability for years to come. So even if you only qualify for a few of the provisions, the benefits can still be worth it. So if you have any expenses that you usually pay each year, then you should definitely use the Tax Extenders to take advantage of the most common items. And the Tax Extenders make filing your taxes a lot more complicated, which is the last thing that you want.
Finally, if you haven’t had a chance to review your 2022 tax return yet, you should check out this post from beginning for some tips to make sure that you do everything right. You’ll need to come up with strategies to ensure that your taxes are less complicated, but you’ll also need to come up with ways to reduce your tax liability. And if you do that properly, you can save a lot of money each year. And if you’re trying to reduce your tax burden, then check out this post from beginning that gives great advice on how to reduce your taxes on your future return.
Present Challenges for Employee Retention Credit (ERC)
Let’s discuss top present challenges for Employee Tax Credit (ERC).
- Delays in review and approval due to budget changes in Congress
The IRS’s ERC was currently set to expire at the end of 2016, and without an extension from Congress, the ERC will expire at the end of the year. And according to the IRS, the expiration of the ERC “would increase the national unemployment rate.”
The IRS says that “Unless Congress acts by January 16, 2022, or until a new law is enacted, the increase in the unemployment rate as of January 1, 2022, would be 1.2 percentage points.” However, this means that if Congress doesn’t pass an extension, then tax return preparers will be filing returns that calculate their ERC by February 15, 2022. And that means that ERC holders will have to pay the extra 2.2% of your W-2 wages for every week that you’re withholding.
- Multi-year ERC filings in 2022
The IRS also said that the ERC “would still be in effect for 2022 as well as subsequent years,” but there would be some significant limitations on what you can claim for ERCs after 2022. For example, the IRS is looking at delaying ERC payments for married couples. And if the ERC isn’t renewed for 2022, then there won’t be any changes to your withholdings and no adjustments for inflation will be made.
- Small business owners won’t be able to claim the ERC
The ERC for small business owners isn’t going away. However, the IRS is now saying that it will be limited to claims for small businesses as of 2022. And the IRS says that small business owners who are not required to make ERC withholdings for their employees won’t be able to claim it.
The ERC is much more complicated to compute, and it’s important to work with your tax preparer and accountant to decide whether you’re eligible to claim the ERC or not. The ERC has a complicated set of rules for filing that you should definitely consider before you claim it. You can learn more about the Employee Tax Credit here.
- Increase in the standard deduction
Congress is looking at several different tax credits and deductions. And one of the more significant ones is the standard deduction. The IRS recently reduced the number of deductions that you can claim in a single year, but that has allowed more people to take the standard deduction. And the standard deduction is set to increase from $6,350 to $12,000 for married couples filing jointly, and from $4,150 to $9,350 for single taxpayers.
And if the standard deduction increases to the level of $12,000 for married couples filing jointly, then that means that ERC holders would be required to pay a 2.2% withholding rate on the difference between what you were originally taxed and the lower standard deduction. If you’re trying to lower your tax liability, then this may mean that you won’t be able to claim ERCs and would have to pay the higher standard deduction instead.
- Higher unemployment rates by 2022
Congress hasn’t specifically changed the ERC expiration, but a July 2022 update to the IRS’s FAQ on the ERC has raised a warning about the future. The IRS said that if Congress does not extend the ERC, then the increase in the unemployment rate could result in 1.2 percentage points of additional unemployment. That would be significantly higher than the 0.6% that the ERC currently calculates.
And if you’re really trying to get the maximum amount of tax savings, then you should be taking every possible deduction, including ERCs. It can end up saving you quite a bit of money. And if you’re trying to avoid claiming the ERC, then you should start maximizing other deductions as soon as you can. The $16,122 Social Security bonus most retirees completely overlook.
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- Paying Social Security on time is essential
It’s one thing to figure out how much you’ll need to pay into your Social Security benefits each year, and it’s an entirely different story to actually pay those benefits. If you fail to make those payments on time, then you’ll increase the chance that you’ll have to pay higher Social Security taxes in future years. And those higher taxes could mean a serious hit to your retirement savings.
But not paying Social Security taxes on time could cost you even more than paying the higher tax penalties in the future. The IRS estimates that just a one-year late payment for Social Security taxes can cost you $131 in tax penalties, and that figure only increases if you’re really running up against the deadline.
- You’ll have less income each year
The key thing that everyone needs to remember about the ERC is that it’s actually meant to help reduce your taxable income. And the idea is that if you lower your taxable income, then you’ll end up with a lower taxable income for the year that you file your return. It works like this:
Calculate how much of your gross income you’re likely to have to report for taxes. That’s the amount of income that you’re legally required to report and may even qualify you for a more favorable tax rate. Deduct the percentage of your gross income that you’re likely to pay tax on by subtracting the $10,000 amount that you claim on Schedule A (lines 63 through 64). Because of the limitation on ERCs, only the portion of your gross income that you’re likely to pay tax on is subject to the ERC.
That number is called the Modified Adjusted Gross Income (MAGI) figure, and for single filers and married joint filers, it’s $50,300 and $75,900, respectively. As a result, if your MAGI figure is $50,300 or more, then you won’t have any extra money to start paying any extra taxes. If your MAGI figure is less than $50,300, then you’ll end up paying less in taxes, and if your MAGI figure is greater than $50,300, then you’ll end up paying more.
All told, the easiest way to pay less in taxes is to simply lower your taxable income and then maximize your tax deductions. That way, you’ll end up paying a lower percentage of your income in taxes than you do right now. And if you follow the above seven steps, you’ll be able to do just that. The $16,122 Social Security bonus most retirees completely overlook.
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Conclusion
Myths and challenges about employee retention credit are discussed in this article. But one thing that you’ll need to keep in mind is that the ERC won’t make you go bankrupt. In fact, if you’ve already taken a number of steps to maximize your retirement income, then the ERC might be just one more step that will help you reach your financial goals sooner.
We hope you found the information that you were looking for in this article on employee retention credits and how to use them to your advantage. Before you consider making any decisions, be sure to consult with a tax professional to ensure that your ERC is calculated in the best possible way. It can take some time to get the most out of this popular tax break.
If you’re looking for help determining whether your ERC will qualify for your situation, our tax professional has the tools you need to get the job done. It ’s never too late to do a little research and figure out the best way to ensure you’re taking maximum advantage of your retirement savings. It ’s possible that you may need to save even more! And if you have questions or concerns, please contact us so that we can help you make the right decision.