The COVID-19 pandemic will go down as one of the most disruptive global events in modern history. Its economic impacts were sudden, severe, and widespread. As consumer activity froze and governments imposed restrictions in early 2020, companies across various industries saw revenues evaporate practically overnight. For countless business owners and leaders, it was a truly challenging time filled with impossible choices.
Amidst the chaos, a lifeline emerged that helped many businesses stay afloat. The Employee Retention Credit (ERC) or Employee Retention Tax Credit (ERTC) gave companies a critical cash flow lifeline at the most desperate hour. The ERTC offered hope when there was little to be found.
This article explores why the ERC was so valuable for impacted yet resilient businesses and workers. It will cover how to ensure your business maximizes the benefits of this crucial program.
Overview of ERC:
The Employee Retention Tax Credit (ERTC) was created by the CARES Act in March 2020 as companies began feeling the initial impacts of the pandemic. It was intended to incentivize businesses to keep employees on the payroll despite declining revenues or COVID-related shutdowns. Originally, the ERC applied only to 2020 but was later extended and even expanded by follow-up COVID relief legislation. Properly navigating the details around the Employee Retention Tax Credit application is essential to maximize its benefits.
Here is an overview of the ERTC and how businesses can apply:
- Eligibility: To qualify for the tax credit, a company must have experienced either a full or partial suspension of operations due to a COVID-related government order or a significant revenue decline compared to prior periods.
- Amount of Credit: The ERC is worth up to $5,000 per employee per quarter.
- How to Claim: Businesses claim the tax credit on their quarterly payroll tax filings (Form 941). If the credit exceeds payroll taxes owed, the IRS issues a refund.
- Documentation: Companies should retain documentation proving COVID impacts and qualified wages paid each quarter.
In essence, the ERTC puts cash directly back into the pockets of businesses impacted by the pandemic. Proper calculation and application are key to maximizing the available tax savings.
Understanding the Tax Credit Calculation:
While the ERTC seems straightforward on the surface, businesses should understand how the 50% credit on qualified wages translates:
- The tax credit applies to up to $10,000 in wages/benefits paid to an employee in a quarter. So the maximum credit per employee is $5,000 (50% of $10,000).
- For employers with more than 100 employees, qualified wages are essentially wages paid to employees not providing services due to COVID disruptions.
- For employers with 100 or fewer employees, all wages qualify regardless of circumstances.
- “Qualified health expenses” count towards the $10,000 per employee wage base.
- Employers cannot “double dip” and claim wages under multiple credits.
- Businesses with PPP loans can claim the ERTC on separate non-PPP wages.
Working through examples illustrating the calculation of the credit is worthwhile to maximize eligible amounts.
Integrating the ERTC into Cash Flow:
For many businesses, the most valuable impact of the ERTC is its ability to drive real cash flow improvements:
- Claiming the credit immediately reduces quarterly payroll tax payments to the IRS.
- If the credit exceeds taxes owed, the IRS issues a refund check for the balance.
- Amending prior 941 payroll tax forms allows retroactive claims back to 2020.
- Credits can be substantial for labor-intensive businesses, potentially adding hundreds of thousands in cash flow.
Incentivizing Employee Retention:
Aside from its cash flow benefits, the ERTC also provided a meaningful incentive for struggling companies to retain employees through pandemic challenges. This supported workers and better-enabled business ramp-ups as conditions improved.
The ERTC’s calculated design directly encouraged employee retention in several key ways:
- Generating credits based on wages paid gave companies resources to maintain worker payrolls.
- Tying credits to COVID impacts rewarded businesses that acted to retain teams despite lower revenues or lost operating capacity.
- Extending the ERTC’s duration provided ongoing incentives to retain staff as conditions evolved.
- Allowing retroactive claims on prior wages compensated companies that already acted to keep workers.
- Imposing no rules on how retained employees must be used provided flexibility to react to changing needs.
In total, the program gave business leaders compelling reasons to keep employees on staff through rocky pandemic conditions.
Staffing for Economic Recoveries:
Looking forward, the ERTC may be most impactful in helping companies staff up appropriately to meet resurging post-COVID demand:
- Companies that managed to retain workers can now deploy those resources to capture growth opportunities.
- Competitors that cut staff may now be short-handed just as activity picks up.
- Forced layoffs require expensive rehiring and training costs to scale back up.
- Employee turnover hurts productivity, customer service, corporate culture, and institutional knowledge.
- Employees you stood by through tough times tend to be more loyal and invested as conditions improve.
- Don’t forget about frontline supervisors and managers. Keeping experienced leadership prevents disruptive gaps in oversight.
- There’s value in maintaining morale and camaraderie that develops from shared adversity. Companies may emerge stronger culturally.
Adapting Workforces to New Realities:
The ERTC also created opportunities for companies to adapt their workforces by reskilling workers for post-pandemic realities:
- Retention incentives provided flexibility to redeploy staff to new functions or build new capabilities.
- Lost revenues allowed to focusing resources on training and transitioning employees to future operational needs.
- Workers idled by COVID shutdowns could be upskilled for changing business conditions, like e-commerce.
- Apprenticeship and development programs help ensure workers are qualified for evolving roles.
For some companies, the ERTC provided a catalyst to align workforces to new business priorities and markets. Those adaptations may drive lasting productivity.
Conclusion:
The COVID-19 pandemic dealt a huge economic blow, but programs like the Employee Retention Tax Credit provided a lifeline for resilient businesses. While still greatly benefiting cash flow, the ERTC’s worker retention incentives could be among its most enduring impacts. Companies that maximize their potential may emerge stronger than ever, ready to capitalize on growth, energized by stability, and propelled by the power of their people. Work with trusted advisors to ensure your business realizes the full benefits of the ERTC.
