The impact of the COVID-19 pandemic is still visible. Across the globe, 43% of businesses temporarily and permanently closed due to the financial crises caused by the COVID-19 pandemic. Employers had to lay off employees to make ends meet or completely shut down their businesses.
The government started many relief programs to facilitate businesses and help them stay afloat. Similarly, California’s government started the Main Street Small Business Tax Credit relief fund to provide financial aid and prevent bankruptcy.
The relief fund was enacted on September 9, 2020, and provides a small business with hiring credit against California state income taxes or sales, provided they meet the qualifications. The fund was extended to 2021 to offer continued support.
This article will discuss the difference between Main Street Small Business Tax Credit and ERTC for businesses to see which one is the better option.
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Difference Between Main Street Small Business Tax Credit and ERTC for Businesses
To understand the difference between the two, we first need to understand them separately.
What is Main Street Small Business Tax Credit
The Main Street Small Business Tax Credit is a relief fund for California’s small businesses to help them get back on their feet and heal the economy. Businesses that faced an economic crisis in 2020 and 2021 and qualify can apply for this tax credit.
Taxpayers can use the tax credit towards income taxes or make an irrevocable election to use the tax credit against sales and use taxes.
2020 Main Street Small Business Tax Credit I
Senate Bill 1447 was enacted on September 9, 2020, allowing qualified small businesses in California to apply for the relief fund and benefit from tentative credit reservation.
The California Department of Tax and Fee Administration (CDTFA) began to accept reservations on a first-come, first-served basis on December 1st, 2020, through an online reservation system. The reservation system was available from December 1st, 2020, to January 15th, 2021, and businesses who applied were notified within 30 days to let them know if they were granted the tax credit and the amount allocated to them.
To apply for the Main Street Small Business Tax Credit, you need to fulfill the following qualifications:
- Has employed 100 or fewer employees as of December 31, 2019.
- The business has suffered a 50% decline in income tax gross receipts when comparing 2020’s second quarter with 2019’s second quarter.
The program’s total funding is $100 million, which needs to be allocated to California’s qualified business employers. Generally, all employers receive $1,000 credit per employee, and the total amount per employer cannot exceed $100,000.
2021 Main Street Small Business Tax Credit II
The California government announced Main Street Small Business Tax Credit II on November 1, 2021, to offer further financial aid to small businesses struggling to make ends meet.
Like before, businesses that qualify for the tax credit will receive a tentative hiring credit, which they can use towards income tax or against sales. Qualified businesses will apply to the CDTFA for the tax credit through an online reservation system from November 1, 2021, through November 30, 2021. The tax credit will be granted on a first-come, first-serve basis.
The major difference between Main Street Small Business Tax Credit I and II are the qualification requirements. To apply, you need to fulfill the following requirements:
- Has employed 500 or fewer employees as of December 31, 2022.
- Had a net increase in qualified employees
- Has suffered a 20% decline in gross receipts from January 1, 2020, through December 31, 2020, to January 1, 2019, through December 31, 2019. This is valid for calendar year tax filers.
- For fiscal year tax filers, gross receipts for 2019-2020 to the fiscal year 2018-2019 are compared.
- For taxpayers whose business started in 2019, compare gross receipts for January 1, 2020, through February 28, 2020, multiplied by 1.5, to the gross receipts for April 1, 2020, and ending on June 30, 2020.
Qualified small business employers will generally be paid $1,000 per net increase in qualified employees, but the amount cannot exceed $150,000 per employer.
How is Credit Calculated?
The tax credit for the California Main Street Small Business relief fund is calculated based on monthly, full-time equivalent (FTE) qualified employees. Before we move on to the calculation part, let’s discuss what an FTE qualified employee is.
- Paid an hourly wage: in such cases, the total number of hours employed by the business should not exceed 167 hours per month, and the wages paid are then divided by 167.
- Paid a monthly wage: in such cases, the total number of weeks employed by the business in a month is divided by 4.33 and then multiplied by the employee’s time base.
- “Timebase” is the fraction of full-time employment that the qualified employee is employed.
- “Weeks employed” is the total number of calendar days that a qualified small business employer employed a qualified employee during the month, divided by seven, not to exceed 4.33.
Now that you know what a monthly full-time equivalent qualified employee is, let’s see how the tax credit is calculated. The net increase of qualified employees is equal to B minus A.
- Use the average FTE employees hired during the three months of April 1, 2020, through June 30, 2020. You can calculate the average monthly FTE by adding the total number of FTE employed and dividing it by 3.
- The lesser of either:
- Calculate the average number of FTE employed from April 1, 2021, to June 30, 2021. Add the total and divide by 3.
- Calculate the average number of FTE employed from July 1, 2020, to June 30, 2021. Add the total for 12 months and then divide by 12.
And that’s it! Now, let’s compare this to the ERTC tax credit to understand the differences between them.
What Is ERTC?
ERTC is a refundable credit that helps employers keep their employees on the payroll during the COVID-19 pandemic. It was created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and provides financial relief to employers by rewarding them with $26,000 per employee.
Businesses can claim the ERTC by paying qualified wages to their employees, including specific health insurance costs paid to employees.
What are Qualified Wages?
Qualified wages are determined by the size of your business (large or small). For instance, for the 2021 ERTC tax credit claim, an employer has deemed a small employer if they have an average of 500 employees or fewer in 2019.
For large employers, eligible wages include all wages paid when the business was suspended or faced a decline in gross receipt and is not providing any services and health insurance benefits up to $10,000 per employee.
For small employers, qualified wages include all wages and health insurance benefits paid to an employee when the employer is considered eligible during the COVID-19 pandemic; whether the business faced a decline in gross receipts or partial/full suspension due to government orders. It doesn’t matter if the employee is working or not.
Benefits of Applying for ERTC
Easy to Claim
The Employee Retention Tax Credit is easy to claim for many businesses and individuals. Depending on your business type, you can apply for the tax credit by filling out the 941-X to claim the credit retroactively, or file the form 941 to claim the credit currently.
Some small businesses can also claim the credit in advance, provided they have less than 500 full-time employees.
Simple Qualification Requirements
Many companies can apply for the ERTC tax credit as the requirements are simple. Private companies and tax-exempt organizations actively traded from 2020 to 2021 are eligible for the ERTC tax credit.
Other requirements include the government order test, which means businesses had to fully or partially suspend their trade or business hours due to government orders, and the employer faced a gross receipt decline of 20% in a calendar quarter compared to the same quarter in 2019, for 2021 ERTC tax credit.
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Lowers Social Security Tax Liability
The ERTC tax credit can also reduce your social security tax liability. If your ERTC tax credit exceeds your social security tax liability, you can apply for a refund, and that amount of the credits will be reconciled on the employer’s form 941 at the end of the quarter.
ERTC tax credit is beneficial because it applies to different sectors; non-profit groups, tax-exempt organizations, and private companies are eligible for ERTC. Moreover, colleges, universities, and businesses operating in the healthcare department can also benefit from the ERTC tax credit.
Compared to Main Street Small Business Tax Credit, the ERTC tax credit is not limited and restricted by multiple qualification requirements and thus is the better option if you are impacted by the financial crises caused due to the COVID-19 pandemic.
We recommend working with a professional CPA firm to help you maximize your ERTC refundable credits for small to medium-sized businesses, as there is a lot of paperwork involved, and the process can get complicated if you don’t have the proper guidance.
Reach out to Skycutter Solutions. The claim procedure only takes 15 minutes, and there are no upfront fees required to get qualified. Just fill out the short questionnaire, upload your documents, calculate the credit, and get paid. Sign up now!