ERC Program – Introduction
ERC stands for Employee Retention Credit Program. The ERC was a federal program created in March 2020 under the CARAR+1.7%ES Act. It is a refundable payroll tax credit. The ERC program was designed to encourage businesses to keep their employees on payroll during the pandemic and to provide businesses with payroll tax credit incentives. In general, an ERC is a tax credit that allows employers to exclude from federal income tax wages and self-employment taxes paid to employees that are paid during a specified period.
The period of time for eligible payroll expenses to qualify as part of the credit can vary but, generally, it’s five years. In other words, if an employer pays an employee for 60, 65, or 70 hours during a week, the employer can exclude 100% of the wages or, if that works better, he or she can exclude 100% of the wages paid to that employee. During the time period for the ERC, wages paid to employees could qualify as part of the credit. To claim the ERC, employers must submit documentation to the IRS that proves that employees qualified for the ERC.
Benefits of Employee Retention Credit Program
ERC Program offers a lot of benefits to businesses that hire and keep employees. Below are some of the top benefits of the ERC Program:
- Employees stay on payroll:
Employers receive payroll tax credits, which can be claimed on the employee’s Form W-2 or Form 1099-MISC, for wages and employer-provided health insurance paid during the ERC period.
- Reduces expenses:
Total taxes paid to the IRS for the ERC period are reduced. Typically, ERC tax credits are refundable, which means they are worth more than their tax liability.
- Easier compliance:
Businesses can now claim the ERC on their employee tax returns and keep their employees on payroll. This will reduce or eliminate any administrative costs associated with claiming and paying the ERC.
- Reduces payroll tax expenses:
Interest on employee contributions to their retirement plans, like 401(k) plans, could be eliminated. Taxpayers also won’t need to make payments to private banks to receive payments from ERC.
- Income tax deduction:
Businesses could also benefit from an income tax deduction for making payments for employees for the ERC period. It could mean that businesses could reduce or eliminate federal income tax payments on their federal income tax returns.
- Improves national health:
Employers that do not have to pay any federal taxes on the ERC income also benefit from this program. This reduces some of the expense that the employer would have to pay to provide health insurance.
- Benefit to employees:
For employees, the ERC provides them with the ability to receive a salary or wages that exceed the minimum income requirements. Workers also have the option to receive wages paid to them during the ERC period or any portion of wages paid during the ERC period as a tax credit. In either case, the pay is considered part of the payroll taxes that the employee would normally pay. The ERC also gives employees the option to receive a credit for wages paid, or received, during the ERC period.
- Productivity:
For employers, the ERC Program can improve employee productivity by providing them with access to more flexible paid leave and flexibility to hire and keep qualified employees. In other words, they can offer more time and flexibility to employees to meet their job-related and family commitments.
- National and state economy:
The ERC program can also provide a boost to the national and state economies. The pay that the employees would have received for working without pay during the ERC period can be paid out as taxes, which would provide the businesses with the cash they need to reinvest in the economy.
- Employee morale and productivity:
Employers should expect employee productivity to increase, as their employees will be happier and more satisfied with their paychecks. Their quality of life will be improved by not being forced to live without pay during the ERC period.
- Tax credits for businesses:
Businesses can also receive tax credits on their ERC-eligible payroll tax liabilities, meaning they will receive a reduction on their taxes owed. For business owners, ERC can be a great option. By giving their employees access to a portion of their salary, they will be able to provide for their families and also continue their commitment to their businesses.
- Simplifies the income tax system:
Business owners will no longer need to have their tax returns prepared, pay tax preparers or meet IRS requirements to report and pay payroll taxes. Instead, they will be able to enter the payments and pay taxes at payroll service providers or directly to the IRS online. With the time, effort and money savings, businesses can use these tax savings to help offset their losses during the shutdown.
- Incentivizes businesses to pay:
A benefit to businesses that choose to pay their payroll taxes during the ERC is an incentive from the IRS to pay employees during this time. Businesses that pay their payroll taxes during the ERC will be eligible for reduced tax rates for 2022 and 2023. Businesses can also expect a possible reduction of 0.5 percent in the amount due. Businesses that choose not to pay their payroll taxes during the ERC will pay a 0.9 percent penalty. Businesses that fail to pay will not receive the tax savings.
- Creates transparency:
Businesses should be able to see their tax liabilities more easily and with more information than before. They will be able to verify how much they owe for the year and have access to more up-to-date payroll tax information in one place.
- Streamlines tax compliance:
With the expanded time period that businesses can use to pay their payroll taxes, they should be able to process and pay payroll taxes more quickly. This will reduce the number of extensions and penalties that businesses will need to file. Businesses can also expect to be able to file electronically through mytaxes.com instead of having to file paper returns.
- Ensures an accurate payroll tax record:
Once businesses pay their payroll taxes, they should be able to rely on the previous year’s payroll tax return, when they paid and filed. This means the IRS will be able to determine an accurate payroll tax record, and employers will no longer be penalized with penalties for underpayment.
- Protects against audit risk:
Employers that are concerned about their tax liabilities can set up a payroll account at mytaxes.com and be able to see and verify their payroll tax liabilities.
- Returns in order:
Businesses can also request direct deposit into their bank account or tax installment payments through mytaxes.com.
- Reduces risks:
By moving payroll taxes out of the IRS and into payroll service providers, companies can receive employee Social Security Numbers faster and make these filings through payroll service providers, so they don’t have to file any forms at all. Even with the shutdown, payroll taxes can still be paid, so if this is a concern, make sure that payroll taxes are paid to your payroll service provider, and, if paying a payroll tax to the IRS, direct deposit or into the bank will do.
- Paid in advance:
The shutdown also gives businesses the opportunity to pay payroll taxes that are due in advance of the due date. Once funds are available at a payroll service provider, payroll service providers will be able to make payments directly to the IRS for payroll tax obligations, rather than having the employee or employer send payment to the IRS.
- No penalties for early payment:
Businesses that paid their payroll taxes in advance will not be penalized for paying ahead of time.
- No penalty for late payment:
Businesses that are late in paying payroll taxes may still be hit with penalties. However, any penalties will be waived if payroll taxes are paid by the deadline to avoid a penalty and due date late filing fee.
- Employers should be aware of this, while another shutdown could happen:
There is still some uncertainty, so it is still recommended that employers contact their payroll service provider for more information, if they haven’t already, to understand the deadline related to the early payment option.
- Don’t wait until the last minute to pay:
It is common that employers do not pay payroll taxes on time, as they try to handle all other aspects of their payrolls during the month. However, there is no time to wait until the last minute to pay payroll taxes, as there will be a potential for a shutdown of all IRS operations, not just payroll taxes.
- Unsecured payroll should be avoided:
Before payroll taxes are collected, a new ledger should be created to store them until they are paid, in case the IRS is unable to access the original ledger to determine the amounts owed to the company.
- The shutdown is creating real challenges for small businesses.
Small business owners are facing real challenges with the government shutdown, particularly when it comes to payroll taxes. Mytaxes.com is a government service that allows payroll and tax issues to be quickly and easily resolved so that business owners can focus on their business.
- Beneficial for small business owners:
With the payroll withholding changes from the Tax Cuts and Jobs Act and the direct deposit option, it is possible that the payroll withholding process might take longer to create. As a result, it is not impossible that this scenario will occur, so it is best to be proactive.
How Does an ERC Program Benefit Employers?
An ERC Program could help small business owners. These programs allow businesses to upload payroll taxes from an account into an electronic system. These payments can be made direct to the IRS without having to go to a business bank. The owner can review the information and verify the taxes as soon as the information is uploaded into the system.
Using an ERC System
When you opt to use an ERC Program, you have several payment options. ERC systems have payment and verification options, which include bank transfer and ACH. Oftentimes, business owners prefer the ACH payment option, since it is a faster option for businesses. The faster the payment is made to the IRS, the faster the IRS is able to remit the taxes to the business owner. This means that there are potential benefits for businesses that choose the ACH payment option. It also reduces any paperwork, such as employee W-2 forms.
Benefits for Employers
Depending on the small business, the ERC program may provide some significant benefits.
- Employers can make adjustments to their ERC Program account on-line.
- An ERC payment option allows employers to create a new payroll or update an existing payroll on-line, without having to go to the bank. This can save employees time. It also provides additional security for the company, as there is additional security over an employee’s pay.
- It is possible to generate an electronic payroll statement in an ERC payment system, which can be viewed by a business owner in real-time. This is a significant benefit for a business owner, since payroll statements can be used to manage payrolls as part of overall compliance, rather than relying on employee W-2 forms to help them maintain accurate records.
- The ERC payment system offers a business owner the ability to quickly track IRS payments and reconcile their pay statements to make sure that they are paid as expected.
- The ERC payment system gives the employer the ability to pay IRS-related tax obligations, such as tax withholding or EIC taxes, through the system.
Final Thoughts
We hope you are able to choose the right retirement plans for your employees. If you are uncertain, you can try a free Employee Benefits Assessment to understand all your retirement options. If your employees are on medical leave, or on temporary duty, and can’t provide you with a paycheck, you should consider applying the Employer Services of Washington’s Paycheck Protection Program to get a refund on any pay that is owed to you.
ERC Program is the first time I think we will see a refundable tax credit for work benefits. However, the tax credit is not meant for large corporations or other similar business groups. It is meant to help smaller employers save tax costs. The Paycheck Protection Program is similar in many ways to the ERC program. Under the program, small businesses that hire additional employees and want to take a benefit out of their employees pay can do so. The benefit they get back in this program is tax-free.