The Benefits of the Employee Retention Credit California (ERC) for Companies: A Lifeline for Businesses
The Employee Retention Credit California, established as part of the CARES Act during the COVID-19 pandemic, has become a powerful tool for businesses struggling to maintain operations and keep their employees on payroll. While initially overshadowed by other relief measures like the Paycheck Protection Program (PPP), the ERC offers substantial financial benefits for companies that qualify.
In this blog post, we’ll explore how the ERC works and why it’s a vital lifeline for businesses seeking to recover from the pandemic’s economic impact.
What is the Employee Retention Credit?
The ERC is a refundable tax credit designed to incentivize businesses to retain employees during periods of economic hardship caused by the COVID-19 pandemic. It applies to wages paid between March 12, 2020, and December 31, 2021. Depending on the year, businesses can receive credits for up to 70% of qualified wages paid to employees, with significant benefits for both small and large businesses.
But the ERC is more than just a credit—it’s a potential cash infusion for businesses needing relief. Let’s dive into the key benefits:
1. Direct Financial Support for Businesses
One of the biggest advantages of the ERC is that it provides immediate financial relief to qualifying businesses. The credit is refundable, meaning if your ERC exceeds the amount of payroll taxes owed, the IRS will refund the difference. This provides critical cash flow, especially for businesses hit hard by the pandemic.
For example:
- In 2020, businesses could claim 50% of qualified wages up to $10,000 per employee annually (a maximum credit of $5,000 per employee).
- In 2021, this increased to 70% of qualified wages up to $10,000 per quarter per employee, meaning businesses could receive up to $7,000 per quarter per employee.
This means that a company with 50 employees could potentially receive up to $350,000 per quarter in refundable credits for 2021 alone!
2. Increased Cash Flow to Keep Operations Running
The cash flow benefit from the ERC helps businesses maintain operations by offsetting the costs of keeping employees on the payroll. The credit allows businesses to manage other operating expenses, such as rent, utilities, and health benefits, without having to make drastic cuts to their workforce.
In times of uncertainty, having access to this cash flow can be the difference between staying afloat and shuttering operations.
3. Encourages Employee Retention and Avoids Turnover Costs
The name says it all—the Employee Retention Credit is specifically designed to help businesses keep employees on staff. Layoffs or furloughs come with hidden costs, including rehiring and retraining new employees when business picks up again. By retaining staff, businesses avoid these long-term costs and maintain a more experienced workforce, ready to resume full operations when conditions improve.
For companies that rely on highly trained staff, such as in the technology, healthcare, and finance industries, this credit is particularly valuable.
4. Retroactive Benefits for 2020 and 2021
One of the most attractive features of the ERC is its retroactive eligibility. Even if a company did not initially claim the ERC during the height of the pandemic, it can still go back and amend prior tax filings to take advantage of the credit for wages paid in 2020 and 2021.
This means businesses can now retroactively file for credits and receive refunds for payroll costs incurred during the earlier stages of the pandemic, which could lead to a significant lump sum of money for companies still recovering from the financial fallout.
5. Flexibility with Other COVID-19 Relief Programs
Initially, businesses that received a PPP loan were not eligible for the ERC. However, later legislation removed this restriction, allowing companies to benefit from both relief programs as long as they do not use the same wages for both the ERC and PPP loan forgiveness. This coordination between relief programs allows businesses to maximize their financial assistance without missing out on crucial support.
6. No Cap on the Total Credit
Unlike some other relief programs, there is no overall cap on the amount of ERC a business can claim, provided it qualifies. This means businesses with a larger workforce or higher payroll costs can receive a substantial credit for their efforts to keep employees on the payroll.
For example, a business with 200 employees could potentially claim millions of dollars in refundable credits across both 2020 and 2021, which can significantly contribute to its recovery.
7. Applicable for Both Full-Time and Health Plan Expenses
Another often overlooked benefit is that the ERC can also be applied to qualified health plan expenses. Even if some employees were not actively working but remained on the company’s health plan, employers can still claim the ERC for those health plan costs. This is a valuable benefit for companies that have been paying for health coverage, especially in industries like hospitality or travel, where employees may have been furloughed.
8. Support for Small and Large Businesses Alike
The ERC was designed to support businesses of varying sizes:
- In 2020, businesses with fewer than 100 full-time employees could claim the credit for all wages paid to employees, regardless of whether those employees were working.
- In 2021, the threshold increased to 500 employees, expanding eligibility to even more companies.
This means that the ERC is accessible to both small and larger businesses, offering much-needed financial support to those impacted by COVID-19, regardless of their size.
How to Qualify for the Employee Retention Credit
To qualify for the ERC, businesses must meet one of the following criteria:
- Experience a significant decline in gross receipts: A 50% decline for 2020 compared to the same quarter in 2019, or a 20% decline for 2021 compared to 2019.
- Be subject to a government order that either fully or partially suspended business operations due to COVID-19.
If your business meets either of these criteria, it may be eligible to claim the ERC, providing an invaluable opportunity for financial recovery.
Conclusion: Why the ERC is a Lifeline for Businesses
For businesses that qualify, the ERC is more than just a tax credit—it’s a financial lifeline that provides immediate relief, supports employee retention, and helps businesses rebuild in the aftermath of the pandemic. With the ability to claim refunds retroactively and coordinate with other relief programs, the ERC stands out as one of the most effective forms of assistance for companies still recovering from COVID-19’s impact.
If your business hasn’t explored the Employee Retention Credit California yet, now is the time. The financial benefits could be game-changing as you work toward a brighter, more stable future.
For more information on how your company can claim the Employee Retention Credit California, be sure to consult with your tax advisor or payroll provider.
