Tax consequences of Employee Retention Credits

In this article, we will be going over not only the consequences attached to employee retention credits (ERCs) but also some tips for using them once you have gained them.

To give a brief background to what the employee retention credits are, it was created during the covid-19 pandemic to help small businesses that were able to retain employees.

For example, if a restaurant managed to maintain most of its employees even at the height of restrictions on in-person business, they would be eligible to receive up to 50% of the first $10,000 in wages during 2020, and 70% of $10,000 in wages per employee during the first three quarters of 2021.

That being said, we are now going to dive into some of the stipulations that come along with this credit after you have received one.

What to know

Once you have your employee retention credits money, you need to understand that the wages that were used to obtain those tax credits are no longer a tax deduction.

Employee Retention Credits don’t work like tax-free PPP forgiveness. This means that you will have to deal with some non-deductible payroll costs and this could lead to taxable income.  

For each business, there are some more specific ideas on what to do with your employee retention credits; however, in general, you’re going to want to think about how to put the money back into the employee to benefit the employer or use those funds for further investment into your company.

Due to the nature of the diverse types of businesses we see, it is only natural that there will be more than one advisable course of action.

However, here at Interactive Accountants, we make it our mission to learn about as many facets of the business world as possible, including advising small businesses on what to do with an employee retention credit. 

What to do

This may seem like a no-brainer, but don’t be afraid to talk with your financial advisor about how to invest these funds, or talk to your accountant about how you can re-invest those funds into your company.

Just as the cases with many types of government funding, they can be underutilized due to a lack of information.

We highly encourage you to do independent research about your specific type of business, whether a restaurant or a law firm and start to get an idea of how the retention credits work.

From there, we would love to help you and your business Implement effective strategies and practices to get the most out of an ERC for your employee and yourself. 

The Next Step

Here at Interactive Accountants, assisting businesses to grow and succeed financially is our number one goal. We are here to help because the better you do, the better we all do!

If you’re still not convinced yet to give us a call, feel free to look at our other blogs regarding the help we offer various businesses and offices.

Beyond the information we have presented in this article, we also focus on accounting for law firms, accounting for medical professionals, accounting for eCommerce, and accounting for amazon DSPs.

If you are a professional in any field that these tips apply to or are simply curious about a topic in this article, please schedule a free consultation here with our owner Matthew Shiebler, CPA. He’s been practicing accounting for over 25 years and is a business owner, just like you!