How the ERTC Influences Stock Options and Compensation Plans

November 19, 2023
Dayes Law Firm

While the Employee Retention Tax Credit does not directly impact stock options and equity incentives, it can affect how businesses structure their compensation plans. This article explores the interplay between the ERTC and financial employee incentives to help eligible employers claim maximum tax credits while complying with ERTC guidelines. 

Overview of the ERTC 

By now, many people have heard of the Employee Retention Tax Credit, or ERTC for short. It is a federal tax credit that falls under the umbrella of the CARES Act (Coronavirus Aid, Relief and Economic Security). 

The objective of ERTC is to provide any eligible employer with a refundable tax credit of up to $26,000 per employee that they can use to keep their business afloat in exchange for keeping their staff on the payroll. 

To qualify for the ERTC, a business would have to meet one of the following two eligibility criteria: 

  1. Report a significant decline in gross revenue in 2020 and 2021 compared to the corresponding quarters of 2019. The exact percentages are 50% in 2020 and 20% in 2021.
  2. Have a full or partial suspension of your operations because of government mandates related to COVID-19. 

As you determine overall eligibility and the wages that qualify for the credit, it’s vital to stay on top of the ever-changing rules. IRS guidance related to the latest Employee Retention Credit ERC rules can be found on their website and various other online resources. 

Calculating qualifying wages for the ERTC requires performing a tally of compensation that is eligible for the credit. These wages include: 

  • Salaries and hourly pay
  • Health plan expenses 

The rules vary for large and small employers, and wages paid to owners and family members may not be eligible for the credit. Determining the amount of the credit is a highly individualized process, which is why it is strongly recommended that you work with a tax attorney or professional to claim the credit. 

How the ERTC Could Affect Employee Stock Options and Equity Incentives 

Though the ERTC has the potential to impact businesses that offer stock options and other equity incentives, the effects are indirect. Keep in mind that employee stock options and equity incentives cannot be counted as qualified wages for ERTC eligibility. 

Still, employers should consider the following relationship between ERTC and stock options, especially if they are exploring the idea of granting stock options or have already done so: 

  • Cash flow: Even though businesses can’t claim the ERTC for compensation paid in the form of stock options and equity incentives, the extra cash that comes from the credit could be used to fund other benefits programs, including ownership incentives.
  • Budgeting: With some cash freed up, small businesses may find that they finally have some breathing room. This can allow them to incentivize employees by offering them stock options or partial ownership.
  • Talent retention: No matter what the state of the economy, attracting and retaining top talent is always vital. Talented workers tend to know that they have options, and they will likely compare total compensation packages. The ERTC funds can help you boost salaries and free up capital to offer stock options.
  • Overall compensation: Employees evaluate more than just the number on their paycheck when contemplating their compensation. Benefits like health insurance and stock options can go a long way toward demonstrating to your employees that you value their contributions.

Need Help Claiming the ERTC? Contact Dayes Law Firm 

At Dayes Law Firm, we have helped businesses across a variety of industries file for over $250 million in ERTC claims. To find out how much your company is eligible for or to get your questions about ERTC and stock options answered, contact us for a free consultation.