Employee Retention Credit (ERC) Updates


Employee Retention Credit

As noted previously, we’ve previously provided our customers with multiple updates and service bulletins to address ongoing issues. As an update, our ERC, which we implemented in the fall of 2017 to encourage our customers to upgrade to a new services provider, has not yet been adopted as widely as we hoped. In the fall of 2017, we made an initial deployment of our ERC to a small subset of our customers. In response to feedback, we identified areas of opportunity to improve the ERC so that it achieved greater adoption by our customers and became more valuable to our largest customers.

As a result of the early adoption, we have spent considerable time validating the roll out and refining the ERC. The ERC works to help our customers retain existing services as they switch to a new carrier by giving them a monthly subscription fee discount. As part of our testing, we have focused on making the value proposition of the ERC clear for our customers and have focused our initial deployment of the ERC on the most valuable types of customers (banks, credit unions, and large enterprise customers). We have had a number of discussions with our customers, and we believe that the ERC is clear and valued by our customers and we believe that it is a strong contribution to our efforts to improve our service to our customers.

With the rollout of the ERC, we have seen a number of issues, including limited adoption among our largest customers. This has led us to provide customers with more clarification and definition of the ERC, as well as the ability to opt out of the ERC if they prefer to. In addition, we have provided a number of refunds to customers that have been impacted by the ERC. It is important to note that, in many cases, customers opted out of the ERC before contacting us to provide feedback on the ERC. In these cases, we have either waived the subscription fees for those affected customers or provided refunds.

We believe these refunds have made the best use of our financial resources. As we prepare for a broader rollout of the ERC, we are continuing to work with customers on the rollout and are committed to making sure that the ERC is adopted by our customers in a fair and consistent manner. We continue to believe the value of the ERC for our customers will be better realized once it is widely adopted by our customers.

Internal Revenue Service (IRS) 2015

In September 2015, the Internal Revenue Service (IRS) announced that it would begin phasing in a new credit for certain companies, called the ECR, and would replace a credit for companies that hired and retained certain low-wage workers (2.25%). At that time, the ECR was set to be phased in starting in 2017 for publicly traded employers. The ECR is scheduled to be phased in starting January 2017 for privately held employers, which includes sole proprietorships, partnerships, LLCs and corporations that have total annual gross receipts of $50 million or less (where the companies are organized as “pass-through” entities).

Because the ECR phases in, the level of the ECR is determined annually by applying the 3.8% “base”-rate reduction from the Job Creation and Worker Assistance Tax Credit (J-CAT) to each of the amounts of the credit set to phase-in (and for private sector sole proprietorships, limited liability companies and partnerships, any amount that phases in is 50% of the tax credit previously received under the J-CAT). To be eligible for the ECR, employers must hire and retain workers and agree to maintain the current payroll levels for the calendar year in which the new year begins. This proposal would permanently extend the ECR for fiscal year 2018. This proposal would reduce the ECR for fiscal year 2019 to $500,000.

Question: Does the ECR decrease the cost of hiring workers?

Answer: No, the ECR does not reduce the cost of hiring employees; the ECR simply replaces the J-CAT credit with a permanent, additional payroll tax credit. A company would not incur a cost associated with hiring someone if they did not have enough tax deductions from prior years. The reduced ECR is a permanent, one-time reduction in the tax rate for the company, based on a percentage of the payroll taxes they paid in the prior calendar year. Because a company has the right to defer bonus and incentive payments to new hires until tax time, the ECR effectively reduces the cost of bonus payments in an economic year for the company. The company would generally not incur a cost associated with hiring someone if it did not have enough deductions from prior years, because it had the right to defer bonus and incentive payments for future years until tax time. Therefore, the company would not incur a cost associated with hiring someone if it did not have enough deductions from prior years.

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Question: What is the definition of “employees” under the ECR?

Answer: The ECR would allow a company to include unpaid family members as “employees” for the purpose of the ECR. A company could include a child who stays home to take care of the family, while working during the day or part-time to pay for college, as an employee of the company. A company could also include a niece or nephew who helps in the family business or is trained in the company’s trade or profession, as an employee of the company. This provision would not allow the company to treat the child as a sole proprietorship or partnership employee, nor would it allow the company to treat the child as a freelancer.

Question: Can an employer that does not pay the full minimum wage receive the ECR?

Answer: The ECR would not allow an employer that pays its employees a different amount of pay than the federal minimum wage of $7.25 an hour to use the ECR to reduce its employees’ income taxes, nor could it be used to reduce the income tax that would otherwise be owed by the employee.

Question: What does the ECR do for minimum wage earners?

Answer: Under the ECR, a minimum wage earner whose employer chooses not to receive a credit would not receive any reduction in their paycheck. However, the ECR would reduce the employer’s payroll taxes, so the minimum wage earner would be taxed at the full payroll tax rate of 24.3% on their wages and tipped wages. These additional payroll taxes would reduce the minimum wage earner’s earnings by an amount that equals the percentage of their wages and tips that they would have received in the ECR.

Question: Does the ECR affect my payroll taxes?

Answer: The ECR affects the federal income tax you pay on the salary, wages, and tips you pay your employees. It does not affect your state income tax or local sales tax. If your employer pays you the prevailing federal minimum wage or the state minimum wage for the locality where you work, then your employer would not receive the ECR credit. However, if your employer pays you an amount that is less than the federal or state minimum wage, then your employer would receive the ECR credit.

Question: How can the ECR affect my payroll taxes?

Answer: The ECR includes the following provisions:

  • 0% ECR payroll tax rate if federal minimum wage is $7.25 or the state minimum wage is at least $12.00
  • No ECR payroll tax rate if federal minimum wage is $7.25 or the state minimum wage is at least $12.00 No ECR payroll tax rate if the average tipped wage for the locality where the employee works is less than $5.90 an hour
  • Incremental ECR payroll tax rates
  • 0% ECR payroll tax rate at first full year of employing a new employee
  • 10% ECR payroll tax rate at first full year of employing a new employee, plus 5% for each additional year
  • 15% ECR payroll tax rate at first full year of employing an individual with at least a full year of service
  • 20% ECR payroll tax rate for each full year an employee works for an employer
  • 30% ECR payroll tax rate for each full year an employee works for an employer, plus a 3% employee payroll tax

Question: What if I am the employee and my employer doesn’t pay the full minimum wage?

Answer: Under the ECR, an employee’s payroll taxes would be reduced to zero. Your payroll taxes would be reduced by an amount equal to the percentage of your tips and your wages you receive.

Question: Are the payroll taxes I am paying being used to raise the minimum wage?

Answer: No, federal payroll taxes are generally used to pay for Social Security and Medicare, as well as pay for other benefit programs.

Question: How do the ECR payroll taxes affect my state tax obligations?

Answer: The state taxes you pay will generally depend on your state’s minimum wage laws. However, the tax exemptions available in the states that don’t require employers to pay their employees the federal minimum wage do not apply to employees who receive the ECR. For example, in New York, ECR payroll taxes are exempt from state income tax, and in California the state minimum wage law does not apply to tips or wage payments.

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Question: If the ECR was a benefit, wouldn’t it also be a tax break?

Answer: No. Under federal tax law, the ECR is considered to be a payroll tax. Therefore, it is a tax. However, the ECR is not considered to be a tax break or a benefit, because it is not being paid by the employer, but is a paid directly by the employee.

Question: How is the ECR calculated?

Answer: The ECR is determined each year by the Congressional Budget Office, using data that is published by the Department of Labor. This data determines how the tax credit is distributed. For example, the average ECR is 0.1% of the total employer payroll taxes. However, the ECR is often “subsidized” by the federal Social Security taxes paid by the employer. For example, if the employer paid the average Social Security and Medicare payroll taxes, the federal taxes paid would be offset by the reduced ECR for the employees.

Question: Does my employer have to pay the ECR?

Answer: Yes, the employer is required to pay the ECR to any employee who is receiving tips or wages of less than the federal or state minimum wage. The minimum wage rate is $7.25 per hour for 2013 and $9 per hour for 2014.

Question: If my employer does not pay the ECR, is there a penalty?

Answer: Yes. A penalty is assessed on the employer’s Form W-2 for each federal and state payroll taxes it fails to pay. The penalty is either $62.50 for each month in 2013 and $62.50 per month in 2014, or $0.20 per pay period, whichever is greater. If the ECR is deducted from an employee’s paycheck, and there is a penalty, the employee would not be responsible for payment of the penalty to the IRS, which is to the employer. However, any penalties due to state or local employment taxes would be due to the employee.

Question: Can I receive the ECR as a benefit if I receive benefits from another employer?

Answer: No. The ECR is not a tax benefit or a benefit to a recipient. It is simply a reduction in the employee’s payroll taxes paid. Therefore, the ECR does not replace the employee’s payroll taxes, but only reduces them to zero. In fact, many people claim the ECR as a tax credit instead of a deduction, which is a technical difference. That way the credit does not reduce the employee’s income taxes. In cases where the ECR was paid as a benefit and not a payroll tax, the employee does not receive a credit against their state or local taxes. For example, in New York, the ECR is considered to be a tax benefit and is not reduced by the state or local employment taxes.

Question: How many states require employers to pay the ECR?

Answer: Although the majority of states do require employers to pay the ECR, it is not required by law in all states. For example, Montana requires employers to pay the ECR for employees that receive tips or wages that are less than the federal or state minimum wage. In addition, California is unique in that it actually taxes tips and wage payments to all employers, whether or not the employer pays the ECR.

Question: Are state and local employment taxes also paid in some states?

Answer: Yes, in some states, ECR is considered to be a state and local tax. The following states require employers to pay ECR:

  • Alaska
  • California
  • Connecticut
  • Hawaii
  • Illinois
  • Maryland
  • Michigan
  • Minnesota
  • Montana
  • New Hampshire
  • New Jersey
  • New York
  • North Carolina
  • Ohio
  • Pennsylvania
  • Rhode Island
  • Tennessee
  • Washington
  • Washington, DC

Question: I work in a state that requires employers to pay the ECR, and I work at an out-of-state job. Does the out-of-state employer have to pay the ECR?

Answer: No. In most cases, an out-of-state employer is not required to pay the ECR because it is considered to be a state tax. However, if the out-of-state employer does not pay the ECR, the company will have to pay the state’s employment taxes. In many cases, the state can impose the ECR to the out-of-state employer to offset the state and local employment taxes. In other words, if the out-of-state employer pays the state’s employment taxes, but fails to pay the ECR, it will have to pay the state employment taxes twice: once for the ECR and once for the state employment taxes. If the out-of-state employer fails to pay the ECR, then the company will pay the state employment taxes twice, one of which will be from the state, the other from the company.

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Question: Can the employer deduct the ECR as a business expense?

Answer: No, the ECR is not deductible as a business expense. However, the company may claim the ECR as a tax deduction on its income tax return.

Question: Can I take the ECR as a business deduction?

Answer: No. Generally, the ECR is considered to be a tax benefit rather than a deduction. However, if the ECR was paid by an employer to an employee as a payroll tax and not as a tax benefit, the ECR is considered to be a tax deduction.

Question: What is the employer’s responsibility to pay the ECR?

Answer: Generally, the employer is responsible to pay the ECR. However, if the ECR was paid by the employer as a payroll tax, then the employer is also responsible to pay the state and local employment taxes.

Question: Can I deduct the ECR?

Answer: In some cases, the employer can deduct the ECR from its income tax return, but not all cases. The IRS recently issued a proposed regulation that defines how a specific employer deduction for the ECR is treated. The regulations can be found at IRS.gov.

Question: What if I already paid the ECR?

Answer: The IRS has provided limited guidance regarding the ECR. In general, the IRS has issued guidance for tax years 2018 and beyond. The IRS does not provide guidance for years prior to 2018. Therefore, it is important that you check the IRS’ Publication 4506-B, Employment Tax, for all ECR questions prior to making any decisions regarding the ECR. It is best to consult with a tax professional to determine your specific situation.

Question: Will an employer’s ECR payments increase the income of my employees?

Answer: The payment of ECR does not increase an employer’s employees’ income.

Question: What types of ECR are generally available to employers?

Answer: The ECR is generally paid to employees at the time the employee is hired. However, employers can also pay the ECR to employees as part of their wages. ECR payments made to employees can be divided into the following three categories:

  • Wages (minimum wage)
  • FICA
  • Company-paid health insurance

The amount of the ECR is based on the worker’s compensation/EOC/Health Insurance or EIC/Company-paid health insurance entitlement (if any).

Question: Is there a cap on the amount that an employer can pay to each employee?

Answer: There is no limit on the amount that an employer can pay to each employee.

Question: Can an employer substitute the ECR for the FICA portion of the employee’s wages?

Answer: No. An employer can pay the ECR and the FICA portion of the employee’s wages. However, the FICA portion of the employee’s wages must be paid from the employee’s pay before the ECR can be added to the employee’s wages.

Question: Does the FICA tax take from the ECR?

Answer: Yes. In fact, the employee is paid taxes on both the FICA portion of the ECR as well as the ECR itself. Therefore, the amount of the ECR will depend on whether the FICA tax takes from the employee’s ECR or from the ECR itself.

Question: Does the ECR impact an employer’s EIC eligibility?

Answer: The EIC is designed to cover the cost of providing workers’ compensation insurance. In general, the EIC must be paid for by an employer’s FICA payroll tax.

Question: Can an employer have only one plan for its employees?

Answer: Yes. However, the employer can also have multiple plans and can choose to pay the ECR as part of the salary or as a separate payment.

Question: If an employer makes payments to its employees as part of the employees’ salaries, does the employer have to add the ECR to the employee’s pay?

Answer: No. The employer does not have to add the ECR to the employee’s pay. However, the employee cannot withhold or remit the ECR.

Question: If an employee does not pay the ECR, can the employer make up the difference for the employee?

Answer: Yes. If an employee is not paying the ECR, the employer must withhold the ECR from the employee’s pay. However, the employer must report and pay the withheld portion of the ECR to the IRS on the employee’s Form W-2.


Hamza Ehs

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