The COVID-19 pandemic has had a significant impact on businesses worldwide, with many struggling to stay afloat during these challenging times. To support businesses and promote employee retention, the U.S. government has implemented various measures, including the Employee Retention Credit (ERC) and Payroll Tax Deferral. While both these programs have been designed to help businesses, they work differently, and understanding how they work together is crucial for businesses to maximize their benefits. In this content outline, we will explore both ERC and Payroll Tax Deferral, how they work independently, and more importantly, how they work together to provide businesses with much-needed financial support. We will also discuss the considerations businesses need to make when deciding between the two programs and the importance of seeking professional advice.
Employee Retention Credit (ERC)
To help businesses keep their staff through the COVID-19 pandemic, the government is offering a refundable tax credit called the Employee Retention Credit (ERC). The CARES Act of 2020 established this credit, and subsequent laws, such as the American Rescue Plan Act of 2021, have both added to and extended it.
If a company’s gross sales have dropped significantly or it has stopped operating in whole or in part because of government orders linked to COVID-19, it may qualify for ERC. Federal payroll taxes, such as those for Social Security and Medicare, can be reduced by as much as $7,000 per employee every quarter in 2021 thanks to this benefit for businesses.
Although the exact amount of the ERC is difficult to determine, in most cases it is equal to 70% of the qualified salaries actually paid to employees during the qualifying period. Not only does employees’ actual pay count toward eligibility but so does the employer’s contribution to their health insurance.
It’s essential to remember that ERC has some restrictions. For instance, companies cannot receive funding from both the ERC and the PPP loan at the same time. In addition, ERC is not available to businesses that have received the Restaurant Revitalization Grant or the Shuttered Venue Operators Grant.
Despite these caveats, ERC remains an invaluable tool for companies fighting the pandemic’s impact on staff retention. The credit has the potential to significantly reduce firms’ operating costs, allowing them to persevere through these difficult times.
Payroll Tax Deferral
Businesses can put off paying their portion of Social Security taxes until after the year 2020 thanks to a scheme called Payroll Tax Deferral, which is available from March 27, 2020, to December 31, 2020. To help businesses weather the storm of the COVID-19 epidemic, the CARES Act included the creation of this initiative.
If your company qualifies, you can put off paying your portion of Social Security taxes from March 27, 2020, through December 31, 2020, and instead pay them in two installments: the first by December 31, 2021, and the second by December 31, 2022. For firms, this deferral can have immediate and substantial positive effects on their cash flow, freeing up resources for other pressing demands.
It’s important to note that deferring payroll taxes does not eliminate the obligation to pay them eventually. Businesses will need to repay the deferred taxes by the respective due dates to avoid penalties and interest.
The Payroll Tax Deferral program has limitations as well. For example, businesses that receive a PPP loan are not eligible for this program. Also, businesses must be careful when deciding to participate in this program, as deferring payroll taxes can lead to a significant tax liability in the future.
How ERC and Payroll Tax Deferral Work Together
While ERC and Payroll Tax Deferral are separate programs, they can work together to provide additional financial relief to eligible businesses during the COVID-19 pandemic.
One way they can work together is by businesses using Payroll Tax Deferral to defer their share of Social Security taxes and then using the cash flow benefit to pay for employee wages during the eligible ERC period. This strategy can help businesses retain their employees while also deferring their payroll tax obligations, providing much-needed financial relief during the pandemic.
Another way they can work together is by businesses using ERC to claim tax credits for qualified wages paid during the eligible period and then using the tax credits to pay back the deferred payroll taxes. This strategy can help businesses reduce their future tax liabilities while also providing them with much-needed cash flow benefits during these challenging times.
However, businesses need to be cautious when using these programs together, as there are limitations and potential risks to consider. For instance, using Payroll Tax Deferral to pay for qualified wages during the ERC period can lead to a significant tax liability in the future if the deferred taxes are not repaid on time. Similarly, businesses that receive a PPP loan cannot use both ERC and Payroll Tax Deferral for the same period.
Considerations for Businesses
While ERC and Payroll Tax Deferral can provide significant financial relief to eligible businesses during the COVID-19 pandemic, there are several considerations that businesses should keep in mind before participating in these programs.
First, businesses need to ensure that they meet the eligibility criteria for each program. Eligibility criteria can be complex, and businesses should seek professional advice to determine whether they qualify for ERC or Payroll Tax Deferral.
Second, businesses need to carefully consider the potential long-term tax implications of using these programs. Deferring payroll taxes can lead to a significant tax liability in the future, and businesses that use ERC to claim tax credits must be prepared to navigate complex tax regulations and reporting requirements.
Third, businesses need to be aware of the limitations of these programs. For example, businesses that receive a PPP loan cannot use both ERC and Payroll Tax Deferral for the same period. Also, businesses that receive certain grants, such as the Shuttered Venue Operators Grant or Restaurant Revitalization Grant, may not be eligible for ERC.
Finally, businesses need to ensure that they have adequate documentation and record-keeping procedures in place to support their participation in these programs. Both ERC and Payroll Tax Deferral have strict reporting requirements, and businesses that fail to meet these requirements may face penalties and interest charges.
ERC and Payroll Tax Deferral are two programs that can provide significant financial relief to eligible businesses during the COVID-19 pandemic. These programs can work together to provide additional benefits, but businesses must carefully consider the eligibility criteria, long-term tax implications, limitations, and reporting requirements before participating in them. Seeking professional advice and maintaining detailed documentation can help businesses navigate the complex regulations and reporting requirements of these programs while maximizing the benefits they provide. With careful planning and execution, businesses can leverage ERC and Payroll Tax Deferral to retain their employees, improve their cash flow, and reduce their future tax liabilities during these challenging times.