The federal government has traditionally placed the highest priority on stimulating growth, development and competitiveness. In contrast, the federal government has placed low priority on helping small business, which is often the largest and most successful employer in any given community. Even as the government was looking for new sources of revenue and attempting to cut taxes, it made no major moves to change tax policies for small businesses, even though many states offer generous tax incentives to support local business.
Even where there are state incentives, federal tax reform was not followed. The federal government has recently been engaged in “tax reform” efforts and I will discuss tax reform more closely in a subsequent blog. The small business tax base has not been addressed. As a result, federal income taxes paid by small business remain at record lows in recent decades. There is therefore a pressing need for immediate tax policy reforms to support small businesses and stimulate job creation and growth.
ERC’s Effective Tax Policies For Businesses
Employee retention credit is the most effective tax policy to stimulate small business job creation. In addition to the competitive economic advantage of reducing turnover, the employment tax credit is a powerful means to ensure that the skills and experience of a qualified employee will continue to be available to the employer. A retention tax credit makes clear to employees that a substantial part of the compensation they receive is dedicated to providing services to the employer rather than other means. The retention tax credit also boosts retention because the compensation makes a larger impact on the employee’s family budget than does a paycheck.
This taxpayer-funded program helps small businesses get off the ground, grow, and achieve job creation, which is essential to stimulate the economy and generate growth. Businesses that are already profitable are excluded from the employee retention credit and the small business tax base needs to be broadened to include companies with revenues over $1 million so that the program benefits more businesses. In a recent release by the Small Business Administration, there were proposals to expand eligibility to companies with annual revenues of $10 million or more. This will support job creation in a growing economy and small business creation is essential to job creation.
ERC – Best For All Businesses!
All small businesses are eligible for an employee retention credit. Most people are unaware that the vast majority of companies are not eligible for the employee retention credit and it is a statutory exclusion. To be eligible for the credit, the employer must employ less than 15 people. Employers are not eligible if they also offer health insurance coverage or retirement benefits to their employees. Small businesses that have one employee are excluded from the tax credit. Although there is a separate law for state and local governments, the IRS does not enforce the state-local provision. The small business tax base should be expanded to include these businesses.
There are other income tax provisions that make it possible to reward good business behavior. These include profit sharing, expense reimbursements, and bonus depreciation. For small businesses, they are highly desirable incentives and the government should give a bigger voice to businesses when deciding how to allocate the tax code. There are many viable tax policy options. The small business tax base could be broadened to include corporations in the corporate tax base, additional income tax expenditures could be eliminated, and state and local governments could be encouraged to establish special tax systems to promote job creation. There are other tax policies that encourage jobs and growth, such as the small business energy credit and accelerated depreciation.
Treasury has identified $33 billion in tax expenditures that could be eliminated. These tax expenditures benefit higher income individuals and include tax preferences for mortgage interest deductions, the carried interest deduction, education savings, and business research and development. These tax expenditures are extremely regressive and mostly benefit the upper half of the income distribution and most of these tax expenditures expire after ten years. Exempting small business from the employee retention tax credit could cost around $300 billion over ten years. It is a nice thing to do, but it doesn’t help small businesses grow and is expensive for the government.
The Small Business Act of 2012 is another potential benefit to small businesses that have been proposed in Congress and is touted as the Small Business Jobs Act. The bills proposals would provide for a 25% income tax credit to encourage small business owners to have their companies pay more federal income taxes by increasing their taxable income. Instead of an employer tax credit, the legislation would offer a tax credit, contingent on the taxpayer meeting certain income thresholds. The credits are restricted to small business income. The credit phases out at higher income levels.
If a small business pays more than 25% of its income in federal income tax, then the taxpayer would be eligible for a tax credit. The legislation would give these credits based on the size of the business. Small businesses with less than $10 million in sales would be eligible for a credit of 25%. A business with less than $2 million in sales would be eligible for a tax credit of 50%. A business with more than $10 million in sales would be eligible for a tax credit of 25%. The credit phases out with higher income levels.
ERC Is Growing With Preserving Tax Incentives
Employee retention credit is a highly popular provision that could help small businesses grow and hire more employees. Employees are often the first employees to leave and it is difficult to replace them. Moreover, research shows that compensation and benefit packages matter a lot to workers and therefore they have strong incentives to stay. A retention credit could encourage employees to stay.
The Small Business Jobs Act of 2012 does not offer employee retention credit. However, the Employee Benefits Protection Act, introduced by Senator Ted Kennedy and Congressman Chris Van Hollen, would offer a similar tax credit but on a larger scale. It is estimated to cost $27 billion per year over a decade. The Small Business Jobs Act does not provide the employee retention credit. I am hopeful that this is part of an evolving approach to tax reform that will offer tax incentives for small businesses to retain their workers.
The EFC is another highly popular tax provision that small business owners use. The EFC allows for up to $500 in tax credits per employee per year. This tax credit is refundable and is available to all eligible taxpayers including small businesses. There is a relatively high ceiling for the EFC but there is a cap at $10,000.
I don’t believe this tax credit should be eliminated because it is too popular with small business owners. A compromise approach might be to repeal the credit for people with incomes over $200,000 or so. In exchange for a repeal, repeal the cap. But let small businesses keep all of the benefits of the EFC. It is important to keep the program as it works for the small business owners.
What Makes The Employee Retention Credit So Popular?
The unemployment rate for young college graduates is around 2.5%. It is high but it is still very low compared to the unemployment rates for young college graduates during the recession and beyond. Generally, business owners are willing to hire employees with relatively low levels of education. This is especially true if those employees have skills that can add value to the business. But it is a two way street. Most young college graduates get their first jobs with no experience. They work hard and do not complain. Even though they often don’t know much about their work, they are eager to learn. They are more loyal than many other workers.
Additionally, young college graduates do not have much debt. They do not have much car payments or student loans. Therefore, when they learn about their job, they stay at the job longer. In addition, most college graduates do not like to see their boss come to work late, miss days of work, or constantly travel. People with low levels of education often like to see their bosses. And they do not like to see the boss miss a day of work because of a doctor’s appointment. The combination of these factors makes it attractive for small business owners to hire college graduates.
But What About Raises?
In recent years, the ERC has been primarily used for providing increases to employee salaries. It is popular for small business owners because it is easy to adjust and quickly. It is also more effective than bonuses and annual raises because it is not diluted by expenses such as commissions. One might argue that other taxes such as corporate taxes should be used for these increases but small business owners do not have a strong preference for paying taxes at higher rates. That is why they use the ERC and raise their employees’ salaries instead of paying higher taxes. And small business owners are also less concerned about the level of their taxes since their business doesn’t operate at a large scale. Therefore, they often have larger business and personal income tax brackets than other business owners.
In my view, eliminating the ERC would not discourage small business owners from hiring college graduates. It would be easy to adjust to and immediately implement a raise or bonus for employees. But it would be a big mistake for small business owners to eliminate the ERC. It is a very popular program with the small business owners who use it. That should be enough. ERC ‘s benefits go to college graduates, who are otherwise working for minimum wage or doing other menial labor, and to the business owners themselves. Eliminating the ERC would punish these college graduates and the business owners who hire them. And these business owners would have to pay much more for the raises and bonuses they give to their employees.
Why ERC ‘s Benefits Should Be Extended?
One argument for eliminating the ERC is that there are many other taxes and benefits for which small business owners are eligible. But it does not make sense for the ERC to be cut when there are so many other benefits that could be at least partially replaced by something similar to the ERC. For example, a deduction for the cost of employees and the cost of their supplies is not a “labor” expense. It is an employee benefit. Therefore, it does not qualify for the deduction.
Employee benefits such as dental insurance and health insurance are also not considered a “labor” expense. These are provided for employees. Their employers provide them. It makes more sense to extend the ERC. Many other types of employee benefits are not tax-deductible. Yet these benefits are very valuable to employees.
Eliminating the ERC would make it harder for small business owners to hire college graduates. That is the big impact of eliminating the ERC. Another big impact is that college graduates would find it harder to get jobs at small businesses. This would result in more people who get low-paying jobs and people who do not get jobs. And both would drive down wages and force college graduates to consider other employment options.
And while it is not relevant for my discussion here, I have to add that some estimates show that when the ERC was first implemented, it led to higher consumer spending and helped many small businesses to succeed. A number of small business owners have used the ERC to hire college graduates, allowing their business to prosper. So not all small business owners have opposed the ERC. Most have used it. And one other thing: the ERC has increased the earning capacity of college graduates since these people tend to be higher earners. This will make them even more attractive to hire for many small businesses.
Employee Retention Credit Is Making “It Takes A Village” More Attractive
Another good reason for keeping the ERC is that many small business owners really want to hire college graduates, but they can’t afford to pay them the higher wages that their skills demand. A couple of years ago, the IRS created a new tax credit for hiring college graduates. Under this new tax credit, a business owner could receive a dollar-for-dollar tax credit equal to 20% of the wages paid to college graduates, up to $5,000.
Many small business owners were happy to find out that they could hire more college graduates. And many college graduates wanted to work at small businesses. But now the IRS has expanded this credit, so that a business can receive a tax credit equal to 30% of the wages paid to college graduates. This is the money that the small business owner must pay to the college graduate for her job.
Business owners who hire college graduates now must give the college graduate as much as $6,000. And the small business owner must also give the college graduate the money that she spent on her education as a grant. In total, the business owner must pay about $11,000 to hire the college graduate.
This additional cost is not a labor expense. It is an employee benefit. Therefore, it does not qualify for the ERC. Yet this money is very valuable to the college graduate. She was promised the job, and she may have spent a lot of money on her education. That money is not a free lunch. It must be paid back. Therefore, it should be considered a “labor expense.”
If a business owner pays a college graduate $5,000, she must pay $3,000 to the IRS as a penalty and $2,000 to the Small Business Administration for the training grant. That means she has to pay $6,000 for her employee, who she needs to hire. To add insult to injury, the $2,000 grant that she received must be paid back. That means that she will have to pay the college graduate about $6,000, which is almost as much as she was offered the job. That is a pretty expensive recruitment incentive program.
ERC Is Thriving The Challenges
The ERC is just one of the federal government’s many programs that reward small businesses for hiring college graduates. Some of these programs and other tax subsidies are quite generous. And many businesses have taken advantage of these generous programs. But a growing number of business owners are voicing their frustration. The need for higher wages is apparent. The difficulty for businesses in hiring college graduates has become apparent. And, many small business owners are seeing the increasing difficulty of having to pay these high wages.
Consequently, business owners are asking Congress to reduce or eliminate many of these programs and subsidies. Congress has actually been listening. So the need for an additional tax credit for hiring college graduates may be on the way out. But we do not know yet if the ERC will survive. And this could have serious implications for the future of small businesses in our nation.
The ERC is another excellent reason to keep the small business incentive program, the EITC, in place. When people find out that they qualify for the EITC, they understand why small businesses need the ERC. Most small business owners are so busy running their businesses that they don’t have the time to find educated and motivated college graduates.
And, without the ERC, many college graduates would not come to their business. Without the ERC, the only way that a small business owner would know that college graduates were interested in working for them would be if they were told. The only way for a small business owner to know that college graduates are out there would be to contact college graduate recruiters, but small business owners don’t have the time or ability to do that.
The EITC is an efficient and effective program that has proven to help small business owners hire educated and qualified college graduates. The ERC helps college graduates who really need to work. It helps small business owners who can’t afford to hire educated and qualified college graduates. It helps those who want to expand their companies. And it helps the education system in our country, which needs to retain talented college graduates.
Small Business owners who run successful businesses should be encouraging Congress to keep the ERC and keep the EITC in place. As a nation, we need to put small businesses first, and they need to be able to hire the best and the brightest employees that they can find. If we give small businesses the tools they need to succeed, then they will be in a position to hire the best people available. They will be able to expand, and they will become big employers, which is good for the economy. The ERC helps small business owners become big employers, which means we all benefit.
Conclusion
The ERC needs to be strengthened and improved, but it should not be eliminated. It is a well-crafted and effective program that has paid huge dividends for small businesses. Businesses are required to hire a certain number of employees, and they are limited in the number of ERC-eligible employees that they can hire. To obtain an ERC, a small business must hire a certain number of ERC-eligible employees. If they do not hire ERC-eligible employees, they cannot be eligible for the ERC. This is all small business owners want: the ability to hire the best people available.
Hope the U.S. Congress will maintain the ERC. Small business owners cannot afford to lose an effective small business incentive. I am very passionate about this program. I truly believe in it, and I know that it has helped thousands of small businesses and their employees. It will be a huge mistake if we make the wrong decision. I encourage you to contact your congressional representative to ask him/her to keep the ERC program intact. If you would like to learn more about this program and other small business incentives, please stay in touch with us.