Q: What is the impact of the Employee Retention Credit (ERC)?
A: Reviewing the Employee Retention Credit, it appears the ERC cannot exceed the actual withholding taxes paid by a company for employee FICA and Medicare between March 31, 2020 and December 31, 2020 - a nine month period.
As a refund credit, it offsets withholding taxes paid by a company - and every company with actual employees must pay FICA and Medicare withholding taxes - when it prepares and files its business income tax returns. The maximum withholding tax payments a company can avoid is $21,000 per eligible employee but, it applies some or all of that maximum amount to withholding tax due. If it could not claim the full amount since its total withholding taxes did not reach or exceed $21,000, then it can apply the unused portion to later returns. The cut off date for doing so are returns due no later than December 31, 2024 (at least it appears so).
From a credit perspective, the impact of the ERC is lower cash out lays for withholding taxes. This increases ordinary business income, which means it increases the tax obligation on ordinary business income. Sub C Corps pay this increased tax directly. Non C Corps, including sole proprietorships, pass this obligation to owners or partners. So for pass-through companies, the company itself pays out less cash for withholding taxes and has more cash to work with, but the owner or partners are now subject to a larger income tax liability on taxable business income.
This trade-off may be a tempest in a tea pot since the true impact can only be quite minor. The company's survival during the pandemic was hardly impacted by withholding tax payments but, rather, by a significant and perhaps fatal loss of revenue during 2020. What may be more important than the exact ERC impact in assessing borrower risk is revenue developments - then and now.
Course overview: Business Income Tax Returns