How will the coronavirus pandemic impact employee retention and organizations’ abilities to pay employees?
Although the full extent of the impact of the COVID-19 pandemic on business operations is still unknown, one thing is certain: Companies will be affected in various ways. Among these impacts are employee retention and payroll. In this blog post, we discuss how companies can best protect their employees through credit and paycheck protection programs.
What is an ERC?
The Employee Retention Credit provides eligible employers with a refundable tax credit against certain employment taxes, equal to 50% of the qualified wages they pay to employees after March 12, 2020, and before January 1, 2021. Employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
Employers can get a 50% credit for wages (including certain health plan costs) up to $10,000 per employee. This credit can be applied to wages already paid after March 12, 2020. Employers can reduce upcoming deposits or request an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19.
What are the benefits of an ERC?
The Employee Retention Tax Credit offers businesses a way to reduce their taxes by up to 70% of an employee’s qualifying wages each quarter in 2021. This credit can save businesses a significant amount of money on their taxes each year.
The ERC Lowers Social Security Tax Liability
The ERC lowers an employer’s Social Security tax liability. Credits are reconciled on the employer’s Form 941 at the end of the quarter. If the credit you receive through the ERC exceeds your Social Security tax liability, you qualify for a refund.
Many Businesses Can Apply for Tax Credit Benefits
Who can qualify for the Employee Retention Tax Credit? The CARES Act specifies two qualifying conditions for companies: First, a company must have suffered either a full or partial suspension due to government orders. Alternatively, a company must have experienced a significant decline in gross receipts. For the 2020 ERC qualifications, a significant decline required a company to experience a decrease of 50% in gross receipts for one quarter. In 2021, the qualifications are a little more flexible.
The Credit Has Been Extended to 2021
The 2021 criteria stipulate that you must face a decline of more than 20% when comparing your current quarterly revenue to the same quarter in 2019 in order to qualify.
You Can Claim ERC for Many Employees
Different-sized businesses can claim the Employee Retention Tax Credit (ERC) for varying numbers of employees. For example, a small employer can claim ERC on all of its employees’ wages. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) defines a small employer as somebody with 100 or fewer workers.
If you have more than 100 employees, you can still claim an Employee Retention Tax Credit on some of your employees. However, those employees must fall under the “not working” classification.
What does this entail? Unfortunately, this could take several forms. To get the most accurate understanding of the full process, you should consult a professional advisor. Regardless of which type of business you run, these retention credits can provide significant benefits for your company. Consult your professional advisors to see how the number of employees may affect how you take a tax credit.
The Credit Has Been Extended to 2021
Since the pandemic continues to affect businesses in some regions, the federal government decided to expand the Employee Retention Tax Credit into 2021. Fortunately, it expands into all four quarters of the year.
This extension gives businesses several new benefits. For example, employers can now receive 70% of the first $10,000 of qualified wages for each employee.
The expanded definition of an eligible employer now includes a new category called the “recovery startup business.” This category is eligible for the employer’s portion of Medicare taxes for the third and fourth quarters.
What is a PPP loan?
The Paycheck Protection Program (PPP) is a loan program designed to help businesses and self-employed individuals keep paying their workers during the coronavirus pandemic. The program was established in 2020 by the United States federal government, under the administration of Donald Trump, through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The Paycheck Protection Program allows entities to apply for low-interest private loans to pay for their payroll and other qualifying costs. The amount of a PPP loan is typically 2.5 times the applicant’s average monthly payroll costs. Some applicants may be eligible for a second draw PPP loan.
The proceeds from the loan may be used to cover payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the business keeps its employee counts and employee wages stable. The program is implemented by the U.S. Small Business Administration. The deadline to apply for a PPP loan was March 31, 2021. Other economists have found that the PPP did not save as many jobs as purported and that it aided too many businesses that were not at risk of going under. They noted that other programs, such as unemployment insurance, food assistance, and aid to state and local governments, would have been more efficient at strengthening the economy.
What are the benefits of a PPP loan?
The advantages of PPP.
Access to private sector finance: – India has a very large infrastructure need and an associated funding gap. PPPs can help both to meet the need and to fill the funding gap by involving the private sector in arranging and providing finance. This frees the public sector from the need to meet financing requirements from its own revenues (taxes) or through borrowing, which is an advantage where the public sector is facing limits on how much capital it can raise. PPPs can help to increase investment in infrastructure and access to infrastructure services by shifting the responsibility for finance away from the public sector. Using private sector finance also allows the public sector to move large capital expenditure programmer’s ‘off balance sheet’, which can be a motivating factor for PPPs in countries where the constraint on finance is a government commitment to a borrowing (i.e. public debt) cap.
Higher efficiency in the private sector: – A well designed and managed PPP can help take advantage of potential efficiency gains from using the private sector.
Increased efficiency is driven by three features of well-designed PPPs:
In a PPP contract, the allocation of risk and the associated rewards and penalties for performance create incentives for the private partner to be efficient at every stage of the project, and to introduce efficiency improvements where possible. By shifting risk to the private sector, the public sector is able to limit its own exposure to cost escalation.
Private partners can design and constructing a project in whole-of-life focus, taking account of the link between construction and operation to minimize costs over the project’s lifetime. A private partner who provides ongoing operations and maintenance management has an incentive to ensure that the design and construction facilitate efficient operation and maintenance.
There is a clear contrast between design and construction contractors who are employed for their specific expertise and those who are contracted for O&M services. The former group takes a narrow perspective, focusing only on their component’s efficiency and not considering how it interacts with other parts of the system. The latter group, however, considers the system as a whole and how different components work together.
When competition is introduced during the bidding stage, market procurement benefits are brought to the table. This is due to the fact that each private sector bidder has an incentive to produce an innovative response and minimize cost, as long as the project is well-specified in terms of output requirements.
Contract uncertainties: – As a PPP agreement covers a long term period, it is subject to change due to the uncertainty of future requirements. If the public sponsor or conditions of the private sector change, the contract may need to be modified, which can be costly to the public sector.
How do you decide which loan is right for you?
Here are some key differences between the ERC & PPP that you should be aware of.
TYPE OF FUNDING
PPP – PPPs often cover a long-term period of service provision, which can be 15-30 years or even the lifetime of the asset. As such, these agreements are naturally subject to uncertainty, and if the requirements of the public sponsor or the conditions facing the private sector change, the contract may need to be modified to reflect these changes. This can entail large costs to the public sector, and the benefit of competitive tendering to determine these costs is usually not available.
ERC – The Employee Retention Credit is a federal tax credit that provides a refundable credit of up to $5,000 to eligible employers. The credit is available to employers who retain their employees and pay them their qualifying wages during the COVID-19 pandemic.
WHEN FUNDING IS RECEIVED
PPP – If you qualify for the PPP, you can expect to receive your funds quickly, often deposited directly to your bank account within a week.
ERC – businesses who qualify for government aid may not see the funds for 4 months or longer. Unfortunately, there is nothing on our end to help speed up the process.
PPP – Banks earn money from processing loans, so there is no cost for you up front. The only cost related to the PPP would be parts of the loan you don’t spend on their forgiveness terms.
ERC – At COS Accounting, we offer a range of tax and accounting services, including a service that many people are not aware of. We do not receive payment from the IRS for offering this service, so we charge a service fee to process your paperwork. (We only charge for those who are approved and want to move forward. Applying to see if you qualify is 100% free.)
Credit and paycheck protection programs are becoming more and more important as the COVID-19 pandemic continues. These programs can help companies to protect their employees by ensuring that their employees’ credit scores are not impacted and that they continue to receive paychecks. To learn more about these programs, please contact us.