The Economic Impact of the Employee Retention Tax Credit

September 7, 2023
Dayes Law Firm

How can the government afford to pay tax credits to thousands of businesses across the U.S.? What economic implications does the ERTC have, and should business owners be concerned? 

The COVID-19 pandemic undoubtedly affected the U.S. economy, and the ERTC may seem like just a drop in the bucket of the larger economic crisis resulting from this unprecedented event. Yet this tax credit has done a lot of good, which is why the government passed it in the first place. 

So, what is the ERTC’s economic impact on a macro and micro level?

Macro Impacts: Increased Federal Deficits by Billions 

The Congressional Budget Office (CBO) released a statement on July 16, 2021, on the budgetary effects of the ERTC. While this statement only represents a partial image of the ERTC, it represents the CBO’s most up-to-date official correspondence on the subject. 

According to the statement, the Joint Committee on Taxation (JCT) initially estimated that the ERTC would increase federal deficits by $55 billion between 2020 and 2031. When the Consolidated Appropriations Act and American Rescue Plan Act expanded the tax credit, that figure increased by another $31 billion. With all estimates included, the official approximation was $85 billion. 

While this correspondence only calculates federal deficits until July 16, 2021, the CBO reports that the federal deficit was already higher than anticipated. Businesses claimed more tax revenue in 2020 and 2021 than the IRS expected; by July 15, 2021, the IRS had processed claims totaling $10.5 billion in Q2, Q3, and Q4 of 2020 and $7.9 billion in Q1 of 2021. 

Businesses eligible for the employee retention tax credit can claim wages paid between March 2020 and December 2020 until April 15, 2024, by creating amended quarterly federal tax returns for those periods. Meanwhile, they can claim wages paid in 2021 until April 15, 2025. 

While the federal deficits incurred from the ERTC will not be calculated in full until 2030, the CBO predicts that the actual costs will exceed the estimated $85 billion. 

Micro Impacts: Positive Effects on Business Activity

The purpose of the employee retention tax credit was to encourage small businesses to keep employees on staff through the roughest periods of the COVID-19 pandemic. The credit allows business owners to claim a portion of the income paid to employees during 2020 and 2021. 

As a result, while the ERTC did send the federal government into a deficit on the macro level, as expected, the ERTC economic impact wasn’t all negative. The credit stimulated the economy and instilled confidence in business owners, lessening the economic burden of pandemic shutdowns. 

Stimulating the Economy

The ERTC was just one of the many government efforts to keep the economy active while the U.S. was in lockdown. This tax credit enabled employees of small and mid-sized businesses to keep their jobs, meaning they could still spend as much as normal on groceries and personal expenses. 

Instilling Confidence in Businesses 

Congress passed the CARES Act on March 25, 2020, one of the earliest days of COVID-19 shutdowns in the U.S. As a result, business owners knew almost from the beginning that they could qualify for this tax credit if their business experienced a decline in gross receipts in the coming months. 

This knowledge allowed business owners to continue maintaining their businesses to the same level while also feeling comfortable spending money on extraneous expenses. The ERTC economic impact helped balance the negative effects of pandemic financial insecurities.

Have you claimed the ERTC for 2020 and/or 2021? If you could benefit from assistance with your application, contact Dayes Law Firm today at 866-684-8114.