To attract top talent, small businesses are offering their employees generous compensation packages and lavish benefits, such as retirement benefits, tuition reimbursement, company cars, free fitness center memberships, and regular work-related retreats. In order to facilitate this rapid growth in the labor force, state governments are adopting payroll taxes that specifically target high-salary employees.
Eliminating the traditional employer payroll tax for these higher-paid employees is a convenient alternative for many firms that pay higher-than-average salaries, such as retail, fast-food, real estate, and law firms. When combined with the expansion of the Earned Income Tax Credit, this allows businesses to hire more employees, while also improving their ability to retain their existing employees and attract new talent.
ERC is now under attack from groups who believe the $500+ tax credit for highly-compensated employees may be unconstitutional. Prior to 2001, in Section 168(b)(6) of the Internal Revenue Code, Section 139(c) was enacted. This provision provides an income tax deduction for companies that exempt up to $500,000 in salary expenses from their employees’ income. These deductions were available to all U.S. firms, regardless of size or whether or not they had any employees. Section 139(c) was amended to make it more difficult for business owners to claim these deductions if the business paid an employee more than $350,000 a year.
This new provision has been met with criticism from both Democrats and Republicans for its perceived unfairness to the small-business sector. While it is true that a highly compensated employee who contributes to employee benefit plans may benefit from the ERC, the majority of small business owners who pay their employees salaries do not pay payroll taxes, and therefore do not receive a federal tax deduction for any of their employees’ expenses. As an employee of a small business that pays a large portion of its employees’ salaries, can you tell me if I would ever benefit from this deduction?
Opponents of ERC claim that Section 139© violates the Constitution by limiting the ERC only to high-paid employees. However, some have argued that the exemption is so narrow that it should not be permitted by the Constitution at all. According to one amicus brief submitted by the Constitutional Accountability Center, “Section 139© reflects the Senate’s position that in the free market, one employer should not be able to pay another employer’s workers more than what another employer pays his own.”
Why Is ERC Still In The Place?
The CAC further contends that the ERC also violates the Due Process Clause of the Constitution because it is “arbitrary and discriminatory because it singles out for the deduction only one group of employers’ employees—those with high salaries, often executives or managers of large, non-profit corporations.” In response to the criticism that the ERC is discriminatory, the Department of Justice and the Office of the Solicitor General have stated that Section 139© does not impose additional taxation. The Solicitor General stated that, “The deduction provided by Section 139© is not an unconstitutional tax. The taxpayers [are] receiving an income tax credit because they make a contribution to their retirement system.”
To give the Federal Government an inordinate amount of tax revenue is unconstitutional. So, there you have it. The ERC has been in existence for many years. It has received a rather mixed reception from both political parties, and it has been thrown out of court several times for its questionable constitutionality. Yet, it remains on the books, it continues to be defended in the courts, and it is still very popular.
The ERC is one of the only pieces of tax legislation that has been very popular with the American people. To this day, Congress cannot garner more than a third of the vote, and the majority of American voters believe that businesses should be allowed to deduct the compensation of their most highly compensated employees. So, why is the ERC still in place? Simply put, many elected officials and tax analysts believe that the ERC is so much of an advantage to small businesses that it must be kept around.
The bottom line is that You, the small business owner, may not benefit from the ERC if you are simply a typical mid-level worker. The benefit may also vary significantly depending on where you live, how big your business is, how much money you have, and what other tax laws you may be subject to. The more you know, the more options you have. And the less tax you have to pay.
How Employee Retention Tax Credit Helps Small Businesses
The Employee Retention Tax Credit enables small businesses to keep their most highly compensated employees when they relocate, relocate their business, or bring in new employees. The ERC has been called a “windfall to employers,” and it has been heavily criticized by those who are concerned about taxation. However, a tax analyst interviewed by the National Tax Journal states that, “In many cases, the ERC reduces business’ tax liability to zero or even to near zero.”
What this means is that small business owners who are moving their business from one state to another may pay no state tax. This will help them stay competitive as the employee base of the new state may have a lower cost of living. This will allow the business to hire more highly paid employees to maximize their productivity and to compete in the market for the best talent.
If your business is already located in a state with a relatively low cost of living and you are changing locations, the ERC is beneficial to you. In this case, the state tax you may pay may go down to zero. And the ERC provides you with a small business tax advantage that you can take advantage of.
This is an advantage that is often overlooked by business owners. There are many other tax incentives that are more comprehensive. However, in many cases, these other tax incentives do not cover the ERC or other provisions. In order to get these incentives, you must meet other criteria. And if you do, you may not even qualify for the credits.
The ERC is unique. It has only been in existence since 1986. It is extremely beneficial to small business owners, and it is still available to them today. For example, when California made its way into the ERC in 1989, the ERC provided the state with $5 billion to fund schools. However, because it was a tax deduction, only about 7% of California businesses were eligible. By 1997, the ERC was worth more than $7 billion for California businesses. This number grew to over $11 billion by 2000, and by 2002, it had grown to more than $12 billion.
Businesses and Individual Income Tax Preparation
The ERC is one of the biggest items on your tax return. The first item to remember is that you must claim the ERC for it to apply to your federal tax liability. This means that the ERC may not be available for a small business owner who claims the earned income tax credit or the child tax credit, even if their total income may actually increase. In fact, a report done by the National Tax Journal revealed that only around 15% of taxpayers who claimed the ERC claimed the EITC or CTC. A study also showed that the ERC is not very popular with small businesses in general, with only 8% of small business owners claiming the credit.
Because the ERC is a tax deduction, it does not go directly onto your tax return. Instead, it goes to the business and is reported on its Schedule C. Most small business owners use a preparer who can provide a tax document containing information on the ERC. An alternate method is to obtain a copy of the document from the IRS website.
This document shows the business owner the deductions the business may claim to offset the ERC. It also explains how to calculate the amount of the ERC deduction and its qualifying income levels. Documentation on this topic is scattered. One tax preparer has a guide to the ERC available on their site, and another provides an ERC outline. Most tax preparers also provide information about this provision in their books.
Running a small business can be challenging, especially if you want to stay in business for a long period of time. Being aware of tax law and being able to benefit from the provisions of the ERC are two things that many small business owners overlook. It is likely that many more would-be entrepreneurs would take advantage of this provision if they knew about it.
Why ERC is Being Shifted Into Future Budgets?
Many people are aware of the potential downside of this provision, that is, businesses that would have taken advantage of it would no longer benefit from it. The current incarnation of the ERC is set to expire in 2023. And many legislators are looking to phase it out. At this point, the current version of the ERC is set to expire in 2022, and the House of Representatives has proposed phasing it out completely.
However, President Trump has proposed leaving it in place for businesses, with a slight modification. The current tax legislation calls for businesses to take the ERC into account for the purposes of calculating their company income. But the President has suggested taking the ERC into account in computing a business’s income, regardless of whether it actually benefited from the ERC. The new approach, as stated in the bill’s original text, would treat the ERC as a tax rate instead of a deduction.
The main reason for doing this is because the ERC is not a dedicated source of funding for the program. In theory, if all of the businesses that take the ERC paid more, more would be available to pay other expenses. Opponents of the proposal feel that the ERC should not be used as a budgetary tool, and that it should be dedicated to paying for the EITC. This would mean cutting back on other items, but it would allow the EITC to pay for itself. Since the Senate has not yet voted on the proposed bill, the debate continues, and it may come down to the vote in the House to see if this proposal lives or dies.
What Should You Do If You Plan to Claim the ERC?
If you are planning to claim the ERC, you’ll want to speak with your tax preparer before making any decisions. He or she can help you figure out the best way to claim the deduction and give you the information you need to make the claim. One important consideration is that you may have other deductions that could take precedence over this one. For example, if you earn a lot of income from interest payments on your mortgage, and your ERC deduction was much more valuable than the interest deduction, your accountant may tell you to take the ERC deduction while making the mortgage deduction more of a priority.
Some businesses owners have taken advantage of the ERC and have run small businesses successfully for many years. The ERC has never meant that a business owner has an excuse for not paying their taxes. The benefit of ERC was supposed to be that a business owner could claim an additional deduction on top of the regular deductions they would have been able to claim. EITC can encourage entrepreneurship by helping pay for your business’s employees and its business costs. But a business that benefits from this could be better off reducing its taxable income as much as possible.