The Employee Retention Credit provides financial support to businesses struggling after the COVID-19 pandemic. The pandemic plagued businesses across several industries by kickstarting an uncertain economy. Supply chain disruptions, inflation, ceasing of business operations, and an unstable market created an unsteady future, especially for small businesses and startups.
Under the CARES Act, businesses who experienced declines in gross receipts, were forced to suspend business operations, and paid qualified wages to employees in 2020 and 2021 are eligible to receive financial aid in the form of a refundable tax credit.
What Is the CARES Act?
The Coronavirus Aid, Relief, and Economic Security Act (known as the CARES Act) was passed by Congress on March 25, 2020. Its purpose was to provide emergency assistance to businesses, individuals, and families impacted most by the 2020 pandemic. After signing into law, it became the largest financial rescue package in history.
For businesses, the CARES Act established several opportunities to provide financial support that could help businesses stay on their feed even after the pandemic. These opportunities included:
The Employee Retention Credit (ERC)
The Paycheck Protection Program (PPP)
The Paid Leave Credit
The Emergency Capital Investment Program
The Emergency Retention Tax Credit, also referred to as ERC, is still available to businesses who paid qualified wages to employees during the 2020 and 2021 tax years.
ERC Tax Credit Benefits
The ERC tax credit provides a multitude of benefits to businesses struggling post-pandemic. It is a refundable tax credit, meaning businesses could receive the rest of the credit in the form of a check if the amount they are approved for exceeds what they owe in taxes for the specific tax year. While saving on taxes, businesses can use the ERC tax credit’s benefits for anything that helps promote the sustainability and even growth of their business.
Unquestionably, the biggest benefit of the ERC tax credit is through financial support. The purpose of the CARES Act was to acknowledge and provide aid to businesses who were financially impacted by the pandemic. Because of inflation, an uncertain overall economy, staffing issues, health concerns, and more, businesses across several industries experienced significant declines in gross receipts.
The approval amount that a business receives from the ERC tax credit can sometimes exceed what the business owed in taxes for the specific calendar year. That excess amount would be sent to the business in the form of a tax refund check, providing them with additional finances to put back towards their recovering business.
Businesses who apply for the ERC tax credit have the ability to save significant money on their taxes. The ERC tax credit provides up to $21,000 in relief per employee to eligible businesses. If you have several employees that you paid qualified wages to during the pandemic, the tax savings can add up quickly!
Encouraging Business Growth
Business growth during the pandemic was nearly impossible for some businesses, and other industries altogether. Lockdowns and additional social distancing requirements meant some businesses, such as restaurants, could not open to full capacity. Other businesses, like concert venues, were unable to accommodate the new restrictions enough to remain open and were forced to suspend business operations indefinitely.
Through the CARES Act, Congress encouraged businesses to rebuild their finances and promote overall business growth in the post-pandemic environment. The ERC tax credit allowed businesses to recoup losses and continue on their path towards steady growth at a faster rate than if they had not been able to receive the tax credit.
Retaining Skilled Employees
One major concern during the pandemic was being able to keep employees on payroll. While business operations were halted, suspended, or reduced during the pandemic, businesses still kept their employees on payroll.
The ERC tax credit made it easier for businesses to retain skilled employees by incentivizing businesses to keep them on payroll. With the tax credit, businesses could actually earn money and save money on taxes by retaining their employees. This helped keep skilled employees within the labor force, as opposed to businesses being forced to put them on leave due to suspended business operations.
Reduced Hiring Costs
Because the ERC tax credit incentivized businesses to keep employees on payroll, hiring costs for many companies were reduced post-pandemic. Businesses did not have to recover lost employees during the pandemic, which would have forced them to restart a whole hiring process. This could save them money on training and even hiring staff, allowing them to instead jump right into business operations as usual in the post-pandemic world.
Assistance to Distressed Industries
Some industries were impacted significantly more than others. The biggest concern was over social distancing policies. Venues were unable to accommodate the new social distancing policies that avoided major crowd gatherings in a single place. Factories requiring too many employees in one place could not operate their business to full capacity. Movie theaters could not have people sit next to each other, and restaurants oftentimes had to close their indoor seating, offering only takeout or outdoor seating. The CARES Act created a beneficial opportunity for the most distressed industries to recover from the pandemic by aiding through the ERC tax credit.
Are CARES Act Benefits Still Available in 2023?
Although 2020 and 2021 taxes have already been filed, the deadline for the ERC tax credit has not passed. There is still a chance to reap the benefits of the ERC tax credit and receive financial aid. To determine whether your business is eligible for the ERC tax credit, you will need to calculate what you could earn using the qualified wages paid to employees during the pandemic.
It is best to apply with the help of an experienced ERC consultant who understands how to navigate applications to the IRS. You do not want to miss out on your opportunity to receive major benefits through the ERC tax credit.