Employee retention credit (ERC) is a crucial form of employee benefit. But it’s something that many business owners make mistakes with. It’s a little like a tax credit that you’re given to offset income taxes. I have helped a number of business owners create and implement ERCs.
However, I’ve also discovered several common errors business owners make in my experience. They include:
- Not including or taking into consideration any salary increases.
Too many business owners think they can pay their employees the same salary every year. However, you want to make sure that your employees get raises to keep them motivated. If you don’t give them raises or are late on them, this leads to low employee morale and job dissatisfaction.
Don’t forget to include the taxes that employees will pay themselves to get raises. It ’s more than a year’s worth of taxes. ERC s don’t replace the value of those taxes but they can be used to offset part of your employees’ taxes.
- Not properly understanding how to calculate the tax credit.
You want your ERC to be more than just a business expense. You need to make sure it’s accurate as it impacts how much you can deduct on your taxes.
For example, if your ERC is a deduction you can only deduct $1 million off your taxes for the tax year, then you can only claim $500,000 on your federal income taxes.
- Not creating a “language of conduct”.
All employees need to understand why your business has an ERC and what’s expected of them. This doesn’t always mean everyone has to be onboard with your ERC. There are employees who prefer to stay employed.
You should have a long-term approach with your employees. It’s like having a family. When your family has a strict set of rules it helps you stick to them. ERCs are the same. You must create a long-term approach for them to stick with. You need to be able to help your employees understand the importance of being committed.
- Misunderstanding the performance obligations of your employees.
ERCs are only effective if your employees understand how they work. There’s no guarantee that they will use the ERC in the same way you will. But remember, if they don’t understand the rules they could end up missing out on the benefits.
In terms of performance obligations, it’s up to your employee how they will be taxed. This can be good or bad. But again, it’s good to ensure your employees know why the ERC is beneficial for them. This will enable them to be more committed and feel less pressured.
- Using the wrong forms.
Unfortunately, there are a lot of forms you need to register your ERC with the IRS. It’s a good idea to prepare a one page (5-8 pages) check list of everything you need to do. You want to have an open line of communication with your accountant so they can advise you when something is wrong.
I’m not saying you should use business forms if your ERC is a business expense, it’s just good to have all the relevant documents and the forms.
- Not using ERC forms in the right situations.
The IRS has stated that you can’t use ERC forms for sales commissions or bonuses. It would be unfair for you to use your ERC for personal gains.
My recommendation is that if you have employees who can share in the value of your ERC they should be receiving a salary increase.
- Not correctly assigning benefits.
You need to be able to assign all the benefits you have for your ERC. This includes health insurance, retirement, life insurance, vacation and sick time, and so forth.
I don’t know about you, but I’m not the best when it comes to figuring out how much my family gets for benefits. It’s nice to know if there’s a discount available for a vacation, but you have to have the right accounting system to track those things properly.
- Not setting specific policies and limits on use.
When setting policies and limits, you must be consistent. Even if you have limitations and limits you should make sure they are clearly visible. For example, my father used to have one set of rules for employees. He thought it was unfair if they asked for more than they were entitled to and they were denied.
If you’re a freelancer, having no set limits means you could end up taking advantage of an employee who might be willing to work for less because they like the work you do. That’s not good for your business. Create policies and limits to cover all areas of your business. You don’t want to be as vague as I was here and end up running into problems.
- Not engaging with them.
Just like your employees, you must get to know your ERC. You need to check in with your employees to make sure they are doing what they are supposed to be doing. You can have a hard time keeping track of your employees when you’re new to them. You might need to invest in some good training to show them exactly how to do what they are supposed to.
Here’s what happens when you don’t have a good working relationship with your employees:
Most companies have policies that allow employees to claim things without providing receipts. The best way to avoid this is to have a plan in place to ensure you and your employees are on the same page. By setting clear expectations and goals you will be able to understand what the expectations are.
Then you can write a process to collect receipts. Your employees might be paid late. If they’re paid too early you’re going to have to catch them at the airport. If they’re paid too late they might end up shorting you in their payment. If your employees are denied benefits they can file a claim with their state government.
- Setting short term goals and not working toward long term ones.
You may have big dreams for your company and your business, but it’s easy to get caught up in chasing short-term goals that will affect you for a few months or even a few months and a half.
For example, you may set an ERC goal of paying $20,000 per month to a particular client and believing that once you reach that level you’ll be able to pay that client off in a month or two. This goal might not seem too outrageous until you try to pay off that $20,000 a month for the next eight months. It might be difficult to make that happen.
Here’s what your $20,000 monthly ERC goal looks like:
You’re probably not going to be able to get there. You’re going to have to take another look at your goals and work toward a larger one. Don’t start the plan you are going to be working with small amounts to accomplish. You will be getting a lot of short term results that will lead to higher long term ones if you do.
- Ignoring your ERC for a long period of time.
If your ERC has been in place for two months and your company is losing money month after month and there is no sign of that trend reversing in the future, you need to look at your ERC. Maybe your goal has shifted from paying off the client to making enough money to pay yourself a salary.
What are the best places to go for help when making your ERC?
There are other excellent ERC software tools out there that are worth checking out. ERCx is the tool I use because of its simplicity and it fits my needs. There are other very good ERC tools out there and I’ll have a post coming soon that talks about them and how to choose the best one for your company.
What’s the best ERC tool out there?
Using ERCx for a limited number of users doesn’t hurt. Just make sure you do your research to make sure they don’t have hidden costs or limitations. One important thing to note is that many of the top ERC tools aren’t priced to the user but to their employers. ERCx is priced to the customer. It is very affordable for a startup.
- My business did not have a drop in gross receipts of 50% or more.
It’s easy to look at your account receivables and think that things are bad. While your receivables may be out of whack, it doesn’t necessarily mean that they are bad. For example, if you have a 90% approval rate you probably have an average of four customers. It’s hard to get that many customers and then only get 4% approval. I would rather say that my 90% approval rate is a good indicator of the quality of my clients. The only way to find out if a customer is worth the money you are paying is to provide them the service and if they are happy, they’ll be making more money on your services.
Another thing to consider is this:
The higher the approval rate, the lower the rate of collection. If you had a 90% approval rate on a $60,000 account, your company may only collect $20,000 in the whole month. It’s better to see a 4% rate of collection on $60,000 than on $200,000. Take a look at your receivables and make sure they are in line with what your target ERC would be. If they are and you still feel that there is room for improvement, you can talk to your banker and ask them what they think of your new ERC model. Your banker has a large incentive to have your account receivables be in line with your goals because if your goal for the month is $10,000 and you are at $5,000, you’re not making much money. They can get out there and find someplace else to invest.
How to increase your client success rate?
By addressing the problem of non-approval right from the start, you’ll see an immediate improvement in your sales. By not only talking to your customers but offering more support and even offering them a rebate if they sign up, you’ll see a much higher percentage of them signing up. This is because they don’t have to spend a lot of time talking to you and can go back to their life and really focus on the most important aspect of their businesses: making money.
- My business was not shut down during the pandemic
First, your business is not the only business in the world. Second, you can almost never say something is impossible. There are plenty of things that you cannot do and there are many things that you will never do, but there are lots of things that you can do.
There was a time when some hospitals said they would not treat people that were ill from the plague. It turned out that doing so would be going against their religious beliefs. In response, many people just died because they couldn’t find a hospital to treat them. It didn’t mean that the plague was gone because it was still around. The fact is, everyone was still sick but they were unwilling to treat them.
With social media, that is no longer the case. It is perfectly acceptable to take a break from social media during an outbreak. Your business is your life and should be a big part of your life. If you need to take a short break from your business, so what? It’s just a break. So are sports games, vacations, and every other recreational activity.
It’s best to sit back and take a step back if something is going on in your business that you feel you can’t handle or is simply outside of your area of expertise. This is the common mistake businesses do for ERC. They let ERC become too big of a focus and are often happy to close it down while on holiday or going on holiday. The reality is that you are going to be monitoring your business 24 hours a day while on holiday.
At least your eyes will be on it. Just realize that your business is more important than you might think and you may find it extremely helpful to have a tool like ERC to help you monitor things and keep you in line with your goals.
- How do I manage my clients when my business is in hibernation?
Get back on social media and make sure people know you’re still around. Many people that are suffering from a major illness or death keep their social media pages closed and generally don’t use the internet. Social media is a great way to keep people posted about your business while you are out of the office and also to make sure that people know you’re still around.
You might also consider setting up a Facebook fan page to track your business’s progress during that time. I’ve been surprised at how many businesses that go out of business do have fans that are able to see what’s going on with their business. While a customer would normally just drop you immediately when they find out that you’re no longer in business, a fan will stick around, tell their friends about your business and ask them to do the same.
But the real reason to set up a Facebook page is to make your fans as passionate about your business as you are about your business. Do you have a big vacation coming up? Get your fans excited about your upcoming travels. Are you having a big event? Set up a fan page that includes all of the information about your upcoming events.
- My business depends on me opening during a pandemic
The above is always true but it’s important to emphasize it with a caveat: If you’re operating in a small town and it’s only an emergency. A pandemic is very unlikely to happen where you are. Instead, you might just want to take some time off to catch up on life or spend time with your family.
Don’t use the opportunity to use your business as a “free pass” to not work. While this might be good for your health, you don’t want to become a slave to work. If you’ve got to work, make sure it’s something you enjoy.
- Will I lose all my customers?
Almost all of your customers will stay loyal to you and be grateful that you opened during the pandemic. Of course, if you’re an organic business that is making a profit or even if you’re just starting out, your customers will not all be grateful that you opened during the pandemic. But they should be.
If your business is an ecommerce business or just an online-based business, you’re going to have to think about things like “How can I prepare a happy and “buy it now” promotion?” or “How can I encourage customers to be extra-generous during this crisis?” These are the types of questions that a smart business owner will ask. You’re going to lose customers, you need to prepare for that, but at least your potential customers will be glad that you’re open.
- My company has grown during quarantine, this isn’t something I should take
It’s great that your company has grown to a certain size but you should use the pandemic to turn your company around. When you open up during the pandemic, many customers will go to the same neighborhood business just to make sure that you’re still there. They may even find you and decide to open up there. Don’t try to grow too quickly during the pandemic.
It’s also great that your ERC is growing, but not when you start calling out to people to open up their business during the pandemic. Don’t make it seem like it’s something that other people should consider. While everyone should be encouraged to help others during the pandemic, it’s your business. Make your customers feel like you’re the only company who has to be open.
- My business is seasonal
Opening during the pandemic is not a good idea for your business if you have a seasonal business. Obviously, there is some window that is going to be open during the quarantine period. In an “off season,” your customers won’t mind that you’re closed. In a season, many people have to choose between going out to eat or staying at home and watching TV. If your business is seasonal, it’s not going to be open during the pandemic.
Instead, focus on services that require no labor (e.g. answering calls, free drinks, free drinks, staff discounts). Other seasonal businesses that might open include resorts or casinos. If your business has something like this as an advantage, that’s great. But keep it seasonal.
- We have employees we need to take care of
Do you have employees? Is this the first day your employees have ever been on the job? If the answer is yes, it’s probably a good idea to take a break from work during the pandemic. Yes, many of us like working and we like the sense of accomplishment that it provides us. But the goal isn’t to work more.
The goal is to work less. If you have employees, many of them may also be people that you rely on to support you in case you aren’t around. ERC s may also open during the pandemic for people that help you take care of your business. If you need a night off, it may be best to leave your employees at home and stay home with them.
- I can’t afford to close down
Not everyone can afford to shut down during the pandemic. There will always be places you can do business if you don’t do business during the pandemic. There’s always ecommerce and there’s always an internet. The best option is to do business during the day and to do a lot of your business during the day.
When the pandemic is over, your employees may not have a job. Your business might have shrunk or been run out of town by people who were there during the quarantine period. Depending on how much your business does during the day, you might not need the same business that you had during the day.
Conclusion
Ecommerce companies like BrickandMortar aren’t going to close down in the middle of the night. It will be a good idea to have a backup plan in place, but there’s no reason to panic. Many businesses can take advantage from ERC s in the first few months of the pandemic. No business should need to close during the pandemic.
What’s the biggest obstacle you might face? Have a suggestion? Let us know in the comments.