Every tax season, federal regulations catch the eye of small business owners. One of the most confusing aspects of tax reform and regulations in 2018 is the Employee Retention Tax Credit (ERC). This tax credit is similar to the Employee withholding tax (EWT) deduction. Both the EWT deduction and the ERC are deductions that employers can claim on their return. However, the ERC is a tax credit for employers, while the EWT is a deduction for employees.
In 2018, the maximum ERC credit amount for a single employee is $3,400, but because of the limits on deductibility, it’s often more beneficial to have the EWT deduction. What’s the difference? First, while the EWT deduction only partially deductible, the ERC is a 100 percent deduction, and therefore you can claim the entire amount as a credit. Second, the EWT is based on a percentage of the employee’s wages, while the ERC is based on the wages, salary, bonuses and tips earned by the employee. Finally, the EWT deduction generally begins on the first dollar earned by the employee, while the ERC starts with all wages earned and paid to the employee.
So, what is the ERC?
The ERC is a refundable tax credit that you can claim on your return. What does refundable mean? A refundable tax credit is not only eligible for the taxpayer, it’s also taxable income. Simply put, if your tax liability in a given year is less than your refundable tax credit, you get a check from the government. How can you get the maximum ERC amount? First, for 2018, the ERC limit for a single employee is $3,400. However, this is for the entire calendar year. For 2018, the ERC is not refundable to taxpayers who earn less than $40,000.
Benefits of Employee Retention Tax Credits
In order to qualify for the ERC, the business needs to have at least one employee working on the day of the taxpayer to be claiming the ERC. The employee must be part-time or be paid on a fixed salary of at least $25,000 for a calendar year. Because the ERC is based on the wages, salary, bonuses and tips paid to the employee, this credit can be a huge benefit to small businesses with a lot of part-time or hourly employees.
For example, let’s say you have four full-time employees working each paying their own way. In the month of January, your employees earned $16,000 in wages and bonuses. To be eligible for the ERC, you need to be paying less than $50,000 in wages, bonuses and tips to one employee. The ERC is calculated based on the employee’s wage and salary, bonuses and tips. If the employee’s salary is at least $25,000, the ERC can be as much as $3,400.
The ERC can be a big benefit to business owners who are hiring hourly or part-time employees, as it is an effective way to bring in new talent. For small business owners with a high turnover rate, it can be difficult to recruit and retain new employees. Because of the ERC, you can qualify your new hire to claim the credit.
What Next Steps Do I Have?
If you’re an employer in the United States, the ERC can be used to claim up to 100 percent of the employee’s wages, bonuses and tips. Some states and even local governments have different rules, so check with your state tax authority for further information. The IRS offers online calculators to help employers determine what amount of ERC is eligible for each employee and what percentage of the employee’s wages, bonuses and tips is eligible.
Income taxes are complicated, so it’s always best to have an experienced CPA and enrolled agent review your taxes and provide tax and accounting advice. ERC can be complex and daunting, so you can always consult with a local CPA or enrolled agent for expert tax advice. Employee retention tax credits can be a huge benefit for small businesses, and can help you attract new employees, offer a competitive salary, and help you keep employees with long-term employment.
Why Small Businesses Need to Compile a W-4?
Unfortunately, in today’s tight job market, employers are having a difficult time attracting and retaining quality employees. With multiple job opportunities available and always-changing employment guidelines, it’s important for companies to review their W-4 forms to make sure they are not having an unfair impact on employee wages.
A W-4 form, which is commonly called a W-4 form, is used by companies to indicate the tax withholding, or the amount of taxes to be withheld from an employee’s paycheck, for each of their qualifying income earners. W-4 forms are critical for setting up employee tax withholding. Without it, an employer may need to make more than one W-4.
Some companies may have one or two tax withholding systems, and other companies may use several different systems for employees, including:
- A traditional W-4
- A 20 percent tax withholding system
- An earned income credit withholding system
- A combination of two or more systems
The problem is that if a company has more than one system, it can confuse employees and lead to issues. For example, imagine two small businesses, and the owner of one business uses a traditional W-4 and the owner of another business uses a 20 percent tax withholding system. If the two businesses are in different cities, both have employees. The owner of the first business could owe the IRS over $100,000 in taxes, but if the owner of the second business used the same system, he would only owe $5,000 in taxes. The 20 percent system simply doesn’t compensate for the high tax rates in some states.
An ERC works by offsetting the employer’s wage tax liability against the employee’s. The ERC doesn’t affect the tax rate, and it also doesn’t reduce the employee’s total tax liability. As an example, suppose that an employee’s combined taxable income is $50,000. She is only paid $30,000, but her W-4 shows a tax withholding of $9,000. Her total tax liability would be $4,000, but her employer’s tax rate would only be $3,400, or 20 percent. The benefit of the ERC is that it allows the employer to have a larger tax withholding of 20 percent than they would otherwise have, which results in an additional $1,600 of tax withheld. In other words, instead of having $9,000 withheld, they would have $11,600 withheld, or $1,600 less than they would have had before.
While it’s not possible for employers to choose their own ERC percentage, it is possible to have a policy that allows for a reduction in the ERC percentage over time. This practice has become increasingly popular in recent years. For example, the Employer Premium Tax (EPT), a tax on health insurance premiums, has recently been reduced from 20 percent to 10 percent. This tax exemption is helpful for businesses who have large employee benefit packages, which generally have higher EPTs than other areas of the country.
An ERC may also be combined with a health-care premium deduction, which reduces the employee’s deductible. So instead of having a $5,000 deductible for health-care costs, the employee’s deductible is reduced by $500. The ERC doesn’t reduce the deductible, but it does reduce the employer’s tax rate. In other words, if you were having a health-care premium deduction of $3,500, and your ERC was $1,500, your insurance premium deduction would be reduced by $300. Your total benefit would still be $5,000, but it would be lower than it would be if the ERC had been used.
If your company is using an ERC or health-care premium deduction, it’s important to file the required paperwork with your employer. They must report this information on Forms 941, 940, and 941A, and they must also file Form 4684 with the IRS. The IRS website has more information on how to prepare and file the paperwork for a specific ERC. It’s also important that your employer knows that you will be using an ERC in your W-4. With that information, your employer can provide the correct withholding percentage based on the number of withholdings that each employee needs.
Each state determines the tax rate applicable to its employees. For example, in Arizona, the tax rate for single employees is 2 percent, and it’s 6 percent for married employees. There are also statewide withholdings for members of the armed forces, the W-2-A exemption, and the Lifetime Learning Credit. It’s important to know your ERC when calculating your total tax withholdings. Many ERCs are also being phased out for employees and employers as new federal and state laws are implemented.
Final Thoughts
The ERC can be a valuable employee benefit. The ERC is particularly beneficial for employees with a high-deductible health plan. For example, if your health plan has a $3,000 deductible, an ERC of $1,500 may be more valuable than a health-care premium deduction of $3,500, since the ERC provides additional tax withholding. Likewise, with a high-deductible health plan, a health-care premium deduction of $3,500 may seem more valuable than an ERC of $1,500. It’s important to review your benefits with an employer that uses ERCs, as your employer’s withholding amounts may differ from the federal and state ERC.