What Is The Importance of Employee Retention Credit (ERC)?

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Importance Of Erc

ERC is a tax benefit designed to help retain qualified employees. The ERC is designed as a gift. A qualified employee can receive ERC for the taxes withheld from his or her wages. Employees who work for more than a 5 day work week (40 hours) and who meet certain qualifications for permanent residency are eligible. If an employer cannot file a return on time, ERC is not available.

If you are an employer who has a qualified employee who has been in your organization for at least 90 days and you have not received a tax return or an invoice for the taxes withheld from your employee’s wages, the IRS may send a bill to the employer for the difference between what you have withheld from your employee’s wages and the total amount of taxes actually paid by the employee, including the additional ERC. If you have already paid a qualified employee more than you owe and the ERC was on your own withholding, ERC does not apply.

Employers must comply with all laws when providing or retaining employees or owe ERC to employees. Employee retention credit does not extend to new employees, same employer, different citizenship, or indirect workers or to an employee’s spouse or children. The benefits and rights described above only apply if the employer has not withheld taxes.

Employers are encouraged to send all tax returns on a timely basis to avoid penalties. If you have multiple employees and you have not filed an ETR within 4 months of the applicable ETR date, you may be subject to tax penalties of $250 per month for each 4-month period (30 months total). The IRS can charge $25 per hour in addition to these penalties if you have a single employee. See Publication 526, Individual Income Tax and Wage Tax Rules, for additional information.

Expense Reporting

An employee’s tax benefits related to the ERC are reported in his or her Form W-2, Employee’s Withholding Allowance Certificate, or (W-2E). The IRS requires employers to withhold the employee ERC and send the employer a Form W-2 for each qualified employee, including the employee’s spouse, as well as a Form 1099-MISC. The Form 1099-MISC includes information on all qualified employees who receive an ERC, including those who have qualified for ERC.

The Form 1099-MISC also includes information on the amount of the ERC paid, who paid it, and for what purposes. The form requires employers to include “Estate,” “Income,” and “Qualified Domestic Trip” amounts as well as an indication that it was withheld from the employee’s wages. Employers must report this information to the IRS on Form 1099-MISC-2 to provide a description of the taxes withheld. Be cautious in listing expenses on the Form 1099-MISC, particularly if the expense is deductible, because an employee’s inclusion of the expense on the Form W-2 can be an indicator of an illegal tax shelter.

Determination Of Qualified Income

The amount of qualified income for the ERC and in the Form W-2 varies depending on a variety of factors, including the employee’s residence, income, and the type of qualifying employer. There is no set income threshold.

Eligibility For ERC

The ERC is calculated based on the employee’s “tail” or fringe benefits, including:

  • Exclusion of qualified education expenses for education, vocational rehabilitation, law enforcement, and military;
  • Exclusion of qualified dependent care expenses for dependents and minors;
  • Exclusion of qualified transportation expenses;
  • Exclusion of qualified military reimbursements;
  • Eligibility for the Thrift Savings Plan (TSP); and
  • A program or program rule that excludes qualified distributions from a Roth or Traditional IRA.

Employers need to document in the Form W-2 that the fringe benefits do not include such excluded benefits.

Employer Withholding Tax

Withholding tax is due by the end of the first quarter after the tax deduction and on the 1099-MISC sent to the employee. The tax withholding must be calculated and reported for each employee on the applicable Form 1099-MISC, a form that is due to the IRS by the end of the third quarter.

Employers should not delay in filing an ETR if they have not withheld taxes and there is a potential for penalties. Employee retention credit offers employees the opportunity to receive an Earned Income Tax Credit for their employment and wages. In some instances, the EITC may reduce the employee’s tax liability. Be careful to verify that the EITC applies in each case.

Retention Credit Application

The Internal Revenue Service (IRS) requires employers to report the value of the employee’s ERC, including tax withheld, to the IRS within 45 days after the end of the tax year, for the purposes of determining whether the employee is entitled to an EITC, a retention credit, or to the ERS refund.

To avoid any potential penalties, it is critical to ensure that the withholding does not exceed the amount necessary to cover employee fringe benefits. Employers should carefully document in the Form W-2 the amount of ERC, including tax withheld, necessary to retain the employee’s eligibility for the EITC and the ERS refund.

Importance of Employee Retention Credit

Exclusion of employee fringe benefits from income by an employer can result in a refundable EITC of up to $6,318 for the 2016 tax year, as compared to the maximum of $3,044 for a single filer and $6,687 for a married couple filing jointly. In addition to the EITC, employees receive a credit for their contributions to a traditional and Roth IRA and a foreign-earned income credit equal to 50 percent of the employee’s eligible contributions for the 2016 tax year.

Here are few points that depicts the importance of Employee Retention Credit or ERC:

  1. ERC for Employment and Wages

The ERC for EWC is based on the employee’s wages paid by the employer. It is not based on other qualified benefits such as health insurance or health savings accounts. The employee’s share is 50 percent of the payroll tax paid by the employer and 35 percent of the employee’s wages.

EWC is available to employees who:

  • Are an employee, other than an independent contractor.
  • Employed at least 270 days during the 12-month period ending on March 31 of the tax year.
  • Worked on a full-time basis for a qualified employer.

Payment of the ERC is required for all W-2 withholdings in 2017, including self-employment taxes, whether the employee has one or more qualifying employment. ERC is an overpayment of withholding tax, but not a penalty for overpayment.

  • ERC for Non-Employee Benefits

Self-employment tax is also a non-employment tax. The ERC for non-employee benefits is equal to 50 percent of the cost of the benefits, including employer-provided transportation and health care, paid to an employee as compensation for services. In contrast, ERC for employee fringe benefits is based on the same method as the EWC. ERC for employee fringe benefits is available to employers with multiple or repeat employees.

The ERC for non-employee benefits is available to employers with an employee with 10 or more days of non-primary health coverage (i.e. for one month or longer in a 12-month period) or self-insuring employer (employer pays 100 percent of premiums for health insurance coverage). In contrast, the ERC for employee benefits is available to employers with an employee with 1 or more months of primary health coverage (i.e. for one month or longer in a 12-month period) or self-insuring employer (employer pays 100 percent of premiums for health insurance coverage).

Example 2a: Suppose the employee received the benefit of a $30,000 cash advance from her employer in 2016 for a consulting engagement that ended at the end of the tax year. She claims an ERC of $6,318 for her $30,000 cash advance and $3,032 for each additional $2,000 cash advance she received in 2016. (The $30,000 cash advance was a voluntary cash advance and did not accrue interest during the tax year.)

Example 2b: Suppose the employer paid the employee $300 per month for health insurance coverage. The employee’s health insurance coverage ended on December 31, 2015, and she was required to pay $400 in premiums for the coverage between January 1, 2016, and December 31, 2015. The $300 per month, cash advance tax is $30 for each month of health insurance coverage. Thus, the ERC for health insurance benefits is $300 x ($3,032 – $20) = $5,000.

  • ERC for Retirement Contribution

The ERC for retirement contribution is based on the employee’s qualified retirement contributions.

  • The employee’s share of the employee contribution for her qualified retirement plan is 25 percent of the employee’s wage base (defined as all salary except social security and Medicare taxes).
    • The employee’s share of the employer contribution for a qualified retirement plan is 12.4 percent of the employee’s wage base.
    • The employee’s share of the employer contribution for a pre-tax plan (defined as one that does not allow for a qualifying contribution) is 8.65 percent of the employee’s wage base.

Example 1: Suppose an employee’s retirement plan contribution for the year is $8,000. The employee’s share is $6,000. If the employee has $18,000 in taxable income, the total tax is $2,000 (i.e. $6,000 x .25) which is $3.05 per $1,000 of taxable income. The employee does not need to pay a penalty for underpayment of income taxes. The employer does not need to withhold any additional tax on this underpayment.

Example 2: Suppose the employee’s retirement plan contribution for the year is $4,000. The employee’s share is $3,000. If the employee has $15,000 in taxable income, the total tax is $2,400 (i.e. $4,000 x .25) which is $2.40 per $1,000 of taxable income. The employee does not need to pay a penalty for underpayment of income taxes. The employer does not need to withhold any additional tax on this underpayment.

Hence, ERC for retirement contributions is 100 percent. It is the employer’s responsibility to make sure that all of the employer contribution is actually paid.

  • ERC for Subsidized Health Insurance

The ERC for subsidized health insurance is based on the employee’s share of the employee contribution for her subsidized health insurance plan. Employee retention credit can be used to offset employer contributions if the employee is leaving the employer group after contributing at least 3 months of premium or for 3 years. It is not possible to use the employer contribution to reduce an employee’s ERC.

Example 1: Suppose the employee’s share of the employee contribution is $6,000. The employer’s share is $6,000. The employee’s share of the employer contribution is $2,600. The employee’s share is 80 percent of the employer contribution. Thus, the employee’s share is $2,600 + $6,000 + $2,600 = $12,600. The employee does not need to pay a penalty for underpayment of income taxes. The employer does not need to withhold any additional tax on this underpayment.

Health industry reimbursements are based on the employee’s share of the employee contribution. Therefore, ERC for health insurance is based on the employee’s share of the employee’s contribution. The employer is not required to withhold any tax. The health insurer is required to withhold federal income tax at the employee’s marginal rate. The ERC will be calculated using ERC for health insurance.

Eliminate any other federal tax liabilities resulting from health insurance benefits. This reduces the company’s health insurance tax burden. An individual who is married and their spouse who is a non-citizen are not eligible for employer health insurance benefits.

  • State Sales Tax Deduction

Sale of taxable goods by a retail merchant is a taxable transaction. Depending on state sales tax laws, you may need to deduct state and local sales tax. If the retail merchant charges no sales tax, the cost of goods is pure profit. If the retail merchant charges sales tax on the sale of taxable goods, then it is required to withhold the state sales tax. The federal tax withholding rate will be a percent of the gross sales price of the taxable goods. The cost of goods used to calculate ERC and sales tax should be the cost used to calculate the ERC.

If there is no sales tax and the taxable good is taxable income, then the cost should equal the after-tax cost. Employee retention credit may also be used to reduce state income taxes. You cannot deduct state sales taxes on employee-only housing (i.e., a home owned solely by an employee, rented solely by an employee or a home where an employee is also a renter).

Note: Failing to withhold income taxes on employee-only housing may result in employee wage and hour or overtime tax liabilities in some states. Some states do not allow a deduction for employee-only housing when the taxpayer has to pay income taxes on wages earned. This has a double impact for taxpayers who receive retirement benefits from an employer.

Workplace-sponsored private health insurance generally has a lower premium cost than employee health insurance. As a result, state and federal employee income taxes on a dollar of net employee income from wages earned are less than a dollar of net employee income from self-employment.

If the amount of gross income is under $75,000, employer contributions to HAS and other tax-deferred retirement accounts are 100 percent deductible from taxable income. If the amount of gross income is more than $75,000, employee contributions to HAS and other tax-deferred retirement accounts are fully deductible from taxable income.

Taxable distributions from retirement accounts are subject to ordinary income tax. Although the amounts may be subject to tax, the amounts are often tax-free as long as they are used to pay qualified medical expenses. For example, if an individual over the age of 65 receives a $3,000 HAS contribution and an exemption for qualified medical expenses, the individual can exclude the $3,000 contribution from taxable income.

The individual then can use the HAS contributions to pay qualified medical expenses. This may also be the case for retirement annuities and defined benefit pension plans, where the amount of income paid by the plan to eligible beneficiaries (such as employees) is excluded from income as long as the payments are for qualified medical expenses. If the medical expenses paid are higher than the individual’s eligible deduction, the taxes due on the excess amounts may be taxed at ordinary income tax rates.

  • ERC Can Be Deducted Against Earned Income

Most of the ERC cost-of-living increases can be deducted against earned income. For example, consider a United States employee earning $70,000 per year with a one-year ERC increase of 3 percent. If the 3 percent ERC increase on that year’s wages is deducted against the $70,000 of earned income, the employee would not pay more than $1,625 in income tax (6.125 percent of $70,000, or $1,625). The result of using the new ERC amount would be that the employee’s after-tax income would be reduced by $1,625. In the example, the ERC change would reduce the $70,000 of gross income to $64,625, but the $64,625 would include an amount equal to $1,625.

Thus, ERC s can often reduce an employee’s state income tax burden. This is especially true in retirement where there may not be another tax to be paid on large or sudden tax-deferred withdrawals. In the most common situation, a taxpayer retired during the year and then took an early distribution from an IRA or 401(k) plan, resulting in a withdrawal that is taxable. If the IRS audits a taxpayer for a large withdrawal from retirement accounts, ERC can be a valuable tool to avoid paying the full amount of taxes due, along with interest and penalties.

  • ERC Is Not Income

Eligibility for a home mortgage does not typically require a borrower to file a federal income tax return. ERC is not income, and tax returns are not required to disclose ERC payments to lenders or other lenders. Eligibility for an automobile loan does not typically require a borrower to file a federal income tax return. ERC is not income, and tax returns are not required to disclose ERC payments to lenders or other lenders.

Eligibility for a home mortgage, car loan, or other loan that does not require a federal income tax return is not generally expected to require the borrower to file a federal income tax return. These loans are typically secured against a property that is often vacant, and in the case of home mortgages, are secured by a lien on the property. Accordingly, the buyer usually does not report the ERC payments on his or her federal income tax return, but instead depresses or raises income (or deductions) to cover the payment to the lender.

Eligibility for an automobile loan typically requires the borrower to file a federal income tax return, as with most other loans. In the event that a borrower has an ERC shortfall, however, the shortfall can be covered by withholding the ERC amount from the auto loan. The borrower can then use the remainder to cover any income taxes due or pay additional taxes or interest that may be due.

The same is true for medical expenses. The maximum amount of interest, penalties, and taxes that a borrower can deduct from his or her income tax return in an ERC situation would be dependent on the loan agreement. When making medical expenses a deduction or credit, the amount must be equal to or greater than the total amount of the debt on which the medical expenses are deducted. The other factor to consider is whether the ERC issue is significant enough that the borrower needs to seek tax advice or do a financial analysis prior to obtaining the loan.

  • ERC Payments Are Not Required

There are certain instances in which payment of ERC is not required by the law. These situations typically have to do with special rules (of which there are a few) that provide more generous treatment to borrowers in these situations. One of the most common is the “use-it-or-lose-it” rule.

In a nutshell, a borrower who pays an ERC obligation that he or she could not use had he or she paid it in the first place must “use” the ERC to get back any interest and penalties that he or she paid on the obligation. But because the ERC would still exist if the borrower paid it, he or she cannot currently or in the future use this obligation in the future without paying the full ERC amount. The borrower would, in effect, be placing a new mortgage on the property in exchange for paying the previous mortgage.

  • ERC Payments Can Cause Interest to Increase

The typical situation in which an ERC payment increases the interest rate on a loan is when the borrower takes a mortgage and does not pay any interest on that mortgage for a number of years. The effect is that the interest rate on the existing mortgage will be greater than the rate on the new mortgage, and in some instances, the new rate can be as much as 4 percent higher. This issue has actually been a factor in several of the recent cases in which the Supreme Court ruled against lenders.

  1. Lenders Control the Decision

If a borrower does not make a payment on an ERC obligation, the obligation will be deemed to have been satisfied on the last day of the month following such payment and the ERC funds will be returned to the lender. However, if the ERC payment is not made, a lien on the borrower’s home remains. Since lenders can also foreclose on the property and sell it, the borrower could lose the property altogether, though the mortgage lender could still continue to collect the ERC and the buyer could continue to use the ERC money to pay the existing mortgage.

This situation is one of the reasons that it is generally better to pay the ERC when the payment can be made on the last day of the month following such payment. This is not always possible, of course. It could be that the ERC obligation that has been placed on the home by a lender in a purchase agreement would not be released until the loan is paid in full.

Another issue is that borrowers might not know when they have fulfilled the ERC obligation. In that situation, the existing lender would likely be the one to decide that the ERC had been paid, and, since they would have a lien on the property, they would probably do a default and demand the property for foreclosure. (Some courts have ruled that this is not permitted, however.)

  1. Homeownership Now Also Becomes a Burden for the Borrower

If the ERC payment is not made, home ownership might be hindered, since the responsibility for payments would be placed on the borrower and the homeowner could be placed in a situation in which the borrower has to pay property taxes, insurance, and other regular living expenses on an ERC debt that, in most cases, would still remain outstanding after the loan is paid.

Also, because some mortgage lenders may foreclose when a borrower defaults on an ERC, some homeowners who are trying to sell their homes or have just refinanced might find their home is no longer theirs, since the mortgage lender still has the right to sell the property and keep the ERC money.

rebecca
rebeccahttps://fxdatapanel.com/
Kate Johnson is a content writer, who has worked for various websites and has a keen interest in Online Signals Report and Stock portfolio generator. She is also a college graduate who has a B.A in Journalism. Read More: Fin Scientists >> Read More: Stocks Signals Mobile App >> Read More: Crypto Signals >> Read More: Crypto Trade Signals App >> Read More: Trade Signal Buy and Sell

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