What Exactly ERC Program Is?
Employee Retention Credit Program is a payroll tax credit program that provides employers of eligible employees with a refundable tax credit of up to $3,000 for wages paid during the period in which the ERC was in effect. Qualifying employees may be current or former employees who worked at least one hour on or before March 13, 2020, and were employed in the United States or who were working abroad as employees of a foreign employer as of March 13, 2020, and were subject to U.S. jurisdiction at the time of the disaster. This should include employees who were killed or injured as a result of the epidemic. The ERC is also available for qualified employees who were released by their employer for economic reasons.
Employers that qualified in 2020 may request a refund of qualified wages (if the ERC program has not fully elapsed by December 31, 2020, and they were not required to take on the risk of future ERC claims). Taxable wages are the wages plus the employer’s standard deduction or tax credit, less any eligible fringe benefits. Qualified fringe benefits include earned sick days, paid vacation, voluntary seniority bonus, bonus pay, medical, dental, vision and other related insurance benefits, salary deferral, and optional payment of salary, premium and other payments.
The SBA’s Paycheck Protection Program was created in the Taxpayer Relief Act (TRA) of 1996 as a program to provide a similar source of financial assistance for employers during a catastrophic event that interrupted normal operations. This ended when the Zika Pandemic began in May 2017. For this pandemic, employees of a company that had already received a CARAR+1.7%ES loan (Loan Obligation) on or before March 13, 2020, are eligible to receive a refund of the amount of the loan received, up to a maximum of $7,000.
To be eligible, the company’s qualifying workers must have not only been terminated because of the pandemic, but also must have been released because of the pandemic. Such “separation” must have been formally recorded in a notice of termination and include any other reasonable cause that the employer might deem necessary to terminate the employee for any reason.
Top Advantages of ERC Program
There are a lot of benefits of this program. Here are the top 10 best benefits of ERC Program:
- Employment Tax Credit
While employer taxes are still in force in the United States, this program will allow companies to limit the liability for those taxes and reward them for keeping their employees on payroll during the disaster.
- Employment Insurance (EI) Benefits for the Unemployed
Under the program, eligible employees are able to receive up to 150% of their normal annual vacation pay. In addition, the program provides up to 150% of the regular annual leave of up to 40 hours for each employee, each day that they worked at least one hour before the disaster and up to 40 hours after the disaster occurred.
- Other Employee Benefits
The program also provides other employee benefits for current or former employees, such as:
• Earned sick days;
• Paid medical, dental, vision and other related insurance benefits;
• Salary deferral or payment of salary, premium and other payments;
• Paid vacation;
• Optional payment of salary, premium and other payments;
• Paid training;
• Discounted fringe benefits;
• Health benefits; and
• Pay for such qualified fringe benefits that were reimbursed in the past year (other than additional paid time off, employee parking, paid meals, or insurance benefits that are purchased separately).
- Tax Refund
In addition, the program also offers a refund of the qualified fringe benefits, including earned sick days, paid medical, dental, vision and other related insurance benefits, salary deferral, and optional payment of salary, premium and other payments.
- Restoring Employee Work Hours or Pay
The program can also provide partial refund of wages or salary in some cases. For example, if an employee was obligated to take a work day for FEMA leave, the program may be able to provide an additional day of work for that employee and provide a partial refund of the wages for that extra day.
- Paying Bonuses to Employees
If a company had a bonus plan in place that paid a bonus to the employee that are allowed under IRS rules, the program can reimburse the company for the amount of that bonus and also provide the employee with the bonus, with the amount being equal to the reduction in the loan. The remaining cost of the loan, after the refund of the benefit amounts, is payable to the Treasury Department.
- Program Type and Limits
The program is available only to employers with 10 or more full-time equivalent employees. The plan is also available only for the individual employees, not for other employees of the company.
- Expenses and Refund
The expenses incurred for the ERC program will be reimbursed to the employer as if the employee had received the benefit, as follows:
• Workers’ compensation insurance fees, including optional renewal
• Company related charges for training
• Additional pay if the employee meets certification requirements
• Salary deferral
• Post-disaster employment assistance
• Leave of absence payments
• Travel expenses
• Unpaid salary
• Expenses related to benefits or fringe benefits
• Optional payment of salary, premium and other payments
• Optional payment of salary, premium and other payments
- Minors and Non-Employees
A covered employer must, to the maximum extent permissible by law, protect the same minors who will be covered by the federal programs in order to qualify for the ERC.
- Time Limits and Minimum Wage
Time limits apply to the program, although the effective date of the time limits cannot be later than April 15 of the tax year in which they are effective. The program does not have time limits, except that a covered employer must pay to the Treasury Department in excess of $50,000 for a partial refund of fringe benefits paid to any individual employee as a result of an ERC program.
- Employment Limits
The employer is not required to provide employment for more than 200 hours to any individual who is not an employee. This means that, for example, an individual who is a sole proprietor or a small business could not be employed as an employee to take advantage of the program.
- Optional Payment of Salary or Premium
A covered employer is allowed to choose whether to pay the employee’s salary, premium and other payments.
- Business Eligibility
The program is available to businesses engaged in one or more of the following types of employment activities:
• Construction
• Hotel, motel, and restaurant management
• Warehouse and manufacturing
• Farming, fishing, forestry, mining and construction
• Agriculture, mining and construction
• Law, medical and dental services
• Installation, maintenance and repair of communications and utilities
• Transportation, storage, catering, banquet and food service
• Other service industries
- Income Eligibility
A covered employer must meet any of the following requirements for each eligible employee:
• Must be a parent company of a trade or business that operates in a single geographic area or that has more than 20 employees
• Company must have 10 or more full-time equivalent employees, which include employees of subsidiary companies, and which are part of the trade or business
• Must be subject to any of the following exclusions from minimum wage laws
• Sales made in connection with the sale or service of food, beverages or lodging services
• Amounts paid to employees for charitable contributions
• Certain aspects of the sale or service of cigarettes, tobacco, non-medical marijuana and medical marijuana
• Most industries exempt from state minimum wage laws, including mining and oil and gas extraction, agricultural activities and farming, ranching and fishing.
- Exclusions
The program is not applicable to individuals under age 21, for whom it is illegal to pay a salary, or those employed for compensation as a regular employee in another state. Nor is it applicable to individuals who provide services to a business.
- Regulation of Contribution Amounts
The contribution limits for contributions under the ERC program are the same as those under state minimum wage laws.
- Regulation of Contributions to an Individual Employee
Contributions are limited to $16,200 per year. Contributions are not considered as income, except for the following exceptions:
• a contribution to a family member is allowed;
• contributions are not considered as income for the purposes of the Subsidy Payment Act (S. 3123; Public Law 114-245);
• contributions are not considered as income for the purposes of the Domestic Investment Act (S. 3126; Public Law 114-246).
- Free Choice of Employer
A covered employer is allowed to permit an employee to choose an ERC employer in lieu of the employer’s regular employment if the employee is under 18 years old, or if the employee otherwise meets the eligibility requirements for an employee, the ERC employer is the employee’s parent company, or if the employee meets the eligibility requirements for a non-employee child, adopted child, stepchild, grandchild or sibling.
- Reasonable Accommodations
A covered employer must provide reasonable accommodation for a qualified individual with a disability. The reasonable accommodation requirement applies to employees, former employees, volunteers, interns and independent contractors.
- Prohibition on an Employer Refusing to Hire an Employee or to Hire a Qualified Individual on the Basis of the Qualified Individual’s Age or Race
Notwithstanding any law to the contrary, an employer may not refuse to hire an employee or otherwise discriminate against a qualified individual because the individual is an employee of another employer or non-employee child, adopted child, stepchild, grandchild or sibling.
- Qualified Individuals
All individuals who meet the eligibility requirements for an ERC job are qualified for a job or other qualified work. Qualified individuals who do not meet the eligibility requirements for an ERC job are not qualified.
- Qualified Industry Areas
Under Subsection (a)(5), an eligible employer may select one of the following industries for ERC jobs, unless the employer has chosen a different industry, in which case the other industry is excluded:
• Building and construction (includes residential building, manufacturing, telecommunications, utilities, waste and solid waste services, and other construction related industries)
• Accommodations (includes horse-racing, breeding, training, riding, show services, trail, equestrian facilities, specialty event rentals, event planning and catering services, entertainment, audio-visual equipment rental, video gaming, aerial crane services, structural, painting, vinyl siding, custom painting, decorating, wallpapering, wallpaper production, stucco, drywall, plastering, roofing, carpentry, and other similar construction related industries)
• Agriculture (includes agricultural and other related services, including livestock production, milk production, meat production, poultry production, vegetable production, agricultural equipment maintenance and repair, distribution, agricultural transportation, seed production, greenhouse production, and any agricultural products or agricultural services other than poultry production, vegetable production, or seed production)
• Retail trade (includes jewelry, shoe sales, amusement, pawnshops, beauty and fitness, clothing, health and personal care, food stores, convenience stores, wholesale businesses selling grocery items, flower shops, general merchandise, and any retail or grocery establishment with general merchandise sales of agricultural, meat, or fish products)
• Mining and geothermal extraction (includes operations in coal, copper, gold, silver, diamond, salt, granite, uranium, oil and gas, natural gas, and any other similar mining, energy, oil or gas extraction, manufacturing, coal or oil or gas processing, production, exploration, or mining related industries)
• Administrative, support, and related (includes all such operations as provide administrative, accounting, clerical, secretarial, information technology, property services, grounds keeping, public relations, janitorial, financial management, or other similar administrative, support, or related services, except poultry farms)
• Educational services (includes all such operations as provide instructional, tutoring, and other related services to students in elementary and secondary schools or institutions of higher education, such as private schools, home school facilities, or institutions of higher education, such as private schools, home school facilities, or institutions of higher education)
• Professional, scientific, or technical services (includes all such operations as provide technical or scientific services, including those that provide services related to broadcasting, cable systems, cable television, computer networking, or satellite telecommunications)
• Professional or skilled trades (includes such activities as welding, pipefitting, plumbing, masonry, painting, heating, ventilating and air conditioning, electrical wiring and service, heating and ventilation, and home maintenance and repair)
• Other service activities (includes accounting, auditing, insurance agency, public relations, risk management, document management, real estate brokerage, concierge services, marketing, cleaning, or laundry services)
- Beneficial Program for Middle Income Households and Those with Pre-School Children
ERC Program is a program that provides income assistance, non-cash assistance, cash transfers, and rental subsidies to low- and moderate-income households and families with children under age 6, currently intended for relief only in the event of a natural disaster for assistance and protection of the unemployed and the employed. Borrowed money will be obligated from the General Fund beginning.
Why ERC Program Is So Different from LIP and/or FSA Program
Taken in total, the federal programs must serve multiple purposes. The federal assistance may not be used to give additional support to one or more programs other than the ERC program. The intent of the U.S. Treasury and IRS is to provide cash assistance from the funds saved from the reduced need for individual and business income taxes as a result of the reduction or elimination of ERC payment. However, the vast majority of households and businesses will not qualify.
The only time the ERC program has been described as a “safety net” program is in connection with, and explained in text and/or in plain language in, the Notice of Proposed Rulemaking, Notice of Proposed Rulemaking, and Notice of Proposed Rulemaking on Determining Tax Status for Individuals and Other Certain Households and Businesses Filing Income Tax Returns under Section 199A(b)(4) of the Tax Cuts and Jobs Act of 2017 (“Tax Cuts and Jobs Act”), also referred to as “the Tax Cuts and Jobs Act,” or TCJA.
The net effect of the TCJA changes to Section 199A(b)(4) and the Regulations and Interpretations issued by the IRS pursuant thereto, including, but not limited to, changes to the standard deduction, the phase-out range, and certain other rules and policies for qualified businesses and qualified partnerships (“QPPs”) as amended by the TCJA, will result in a very small percentage of taxpayers paying substantial income tax under section 199A(b)(4).
These amounts, however, will be subject to the deduction limitations of the TCJA, rather than the ERC program, and therefore will not be subject to the ERC program. In addition, because the ERC program is not subject to the $250,000/$500,000 income limitation, only a small percentage of households and businesses will be impacted by the ERC program, regardless of the percentage of income that may be subject to income tax under the proposed regulations and rules issued by the IRS.
What If My Household Was Eligible for ERC?
To date, the IRS has not published any “deadline” for submitting a request for ERC. The deadline is when, not if, the IRS and Treasury publish the Notice of Proposed Rulemaking on Determining Tax Status for Individuals and Other Certain Households and Businesses Filing Income Tax Returns under Section 199A(b)(4). However, in order to know for certain whether your household was eligible for ERC, you must submit a Request for Assessment (“RFA”) for payment. This process is outlined in Notice 2018-54, Notice of Proposed Rulemaking on Determining Tax Status for Individuals and Other Certain Households and Businesses Filing Income Tax Returns under Section 199A(b)(4) of the Tax Cuts and Jobs Act of 2017 (“Tax Cuts and Jobs Act”), which describes the ERC program, and links to information and instructions about ERC.
How to Submit an RFA
In order to apply for ERC, you must complete an RFA. The application can be completed online (“e-file”), using IRS e-file systems; a paper copy can be completed and returned (“postmarked”), or mailed (for recipients in a foreign jurisdiction) to the appropriate IRS location listed on Form 8829. In addition, individuals who are divorced or have a child under age 19 who will not be a U.S. citizen or national on his or her tax return must complete Form 8332 (“Joint Return”), which can be downloaded from the IRS website at https://www.irs.gov/newsroom/how-to-file-a-joint-return. Additionally, to be considered a “qualified business,” the business must be organized as a corporation, partnership, limited liability company, sole proprietorship, or unincorporated association. For more information about the definition of a QPP, see Notice 2018-87, Notice of Proposed Rulemaking on the Efficient Distribution of Profits in a QPP.
An RFA requires information on the form or on a transcript of your Social Security or Medicare taxes. It also requires the names of the taxpayers, their spouses, and their dependents, as well as, the W-2, 1099, and other forms, of the individuals or households for which the payment of taxes is being sought. An RFA can be submitted by mail, fax, or e-mail (via the IRS e-file system). If you used e-file for your tax return and received your RFA from the IRS by the filing deadline, you do not need to file another application or request more information. The RFA does not require information on gross receipts, or gross income for a corporation, partnership, or sole proprietorship. All required information for individuals filing a joint return can be supplied in their joint return, or can be provided separately.
The RFA is not complete until it is approved by the IRS, and that approval is not guaranteed. To be approved, the RFA must meet all the following conditions:
- Be sent to a valid mailing address;
- Covers an average annual gross income for the last three years of at least $157,000 (inclusive of half of the “above the line” tax) or $315,000 (inclusive of half of the “above the line” tax) plus at least $21,000 (inclusive of half of the “above the line” tax) plus a foreign earned income exclusion (as of January 1, 2018) for the taxpayer with the highest adjusted gross income;
- Be signed by a responsible party such as the taxpayers; and
- Not contain an erroneous statement or incorrect information.
The IRS encourages taxpayers to submit a complete and accurate RFA and to do so as soon as possible after the RFA is received. If you choose to receive payment directly from your qualified business, you must complete Form 8332 for that payment.
Conclusion
As the scope of the pandemic develops, an ERC will help employers who are unable to offer their employees paid leave. This is an important benefit for employers, who want to protect their employees who could be at-risk for loss of income due to the flu. The amount of a credit will be calculated on a monthly basis. It may also be applied to salary adjustments, bonuses, or long-term disability payments. The ERC will continue to be available through March 2023.