• The large number of new programs for small businesses is causing choice overload.
  • Tax professionals and small business owners are confused by the conflicting guidance from the IRS.
  • The Employee Retention Credit (ERC) could be worth more to a small business owner than a Payroll Protection Program (PPP) loan.
  • Business owners are focusing on the forgivable PPP loans and forgetting about the possible better value in the ERC where you do not need SBA approval.
  • Time is running out for small business owners to make a choice before some benefits are lost forever.


In 1970 Alvin Toffler introduced us to the concept of overchoice in his book Future Shock, where many people freeze instead of taking action when offered too many choices. Choice overload has been studied extensively over the past decade with the evidence overwhelming that more choices does not lead to better results. Rather, too many choices makes people less happy. And worse, causes many to do nothing even when any action would be preferable to doing nothing at all. 

Too many choices can cause you to make the worst choice of all: doing nothing.

While choice overload is a common discussion in investing circles, overchoice is rearing its ugly head again with the CARES Act and other stimulus measures to deal with the pandemic. Seasoned tax professionals are challenged by the new programs and the IRS and Treasury Department have been less than helpful in their guidance, changing the rules time and again. 

Overwhelmed small business owners and tax professionals stunned into inaction need to snap out of it fast. Many of these programs have an expiration date. Businesses need to access these resources while they can — even if they don’t have a current need — so the funds are available when they are needed later in the year.

This article will focus on the Employee Retention Credit (ERC) and how it relates to other stimulus programs. Unlike the PPP where loan forgiveness is based upon set factors, the ERC is a tax-free credit that never has to be paid back. 

Business owners are focusing on the forgivable PPP loans and forgetting about the real value in the ERC, where you do not need SBA approval. Just because you qualify for a PPP loan does not mean it is the best course of action. Some business owners may want to return the PPP loan in favor of the ERC. 


Qualifying for the ERC

The best way to determine if the ERC is a better option for your business we will need to review the details of the ERC program and then compare those details to various features of the PPP.

Here are the general facts of the ERC:

  1. The ERC is a refundable tax credit of 50% of the first $10,000 of wages per employee, including health insurance benefits paid by the employer. The maximum credit is $5,000 per employee. Wages after March 12, 2020 to December 31, 2020 qualify.
  2. The ERC applies to any qualified business in operation in 2020. For the ERC, the business must have had full or partial suspension of operations at any time during 2020 or Point #3 below. This is probably an easy hurdle to jump because current IRS guidance states that limited group meetings or travel would satisfy this requirement and most states have limited these activities.
  3. A qualified business must experience a greater than 50% decrease in gross receipts unless the business qualifies under Point #2 above. The ERC starts the first quarter of 2020 that gross receipts are below 50% of the 2019 gross receipts for the same quarter and continues until gross receipts are greater than 80% of the 2019 gross receipts of the same quarter, or until the end of the fourth quarter of 2020, whichever comes sooner.
  4. For employers with an average of 100 or fewer full-time employees in 2019, qualifying wages are all wages paid as outlines in Point 1 and 3 above and 5 below. If the employer has an average of more than 100 full-time employees in 2019 the credit is limited to wages paid to employees while not working. Wages must be no more than the equivalent amount paid the 30 days prior to the suspension or reduction of services. Full-time employees are defined as employees who average 30 or more hours per week or average 130 or more hours per month.
  5. Employer paid health insurance premiums not included in employee’s income are included in qualified wages.
  6. The ERC is taken on Form 941 starting with the second quarter of 2020. The IRS, as of this writing, has not issued an updated Form 941 to reflect this credit. You can check here for the most current Form 941.
  7. The credit reduces the employer’s payroll taxes to zero before becoming refundable. 
  8. Any credit over the payroll taxes reported on Form 941 are refundable. 
  9. Employers can apply for an advance refund of the ERC, sick and family leave credits on Form 7200. 
  10. An employer needs to decide between a PPP loan and the ERC, as both are not allowed for the same employer.
  11. Sick and family leave credits are allowed along with the ERC, but not on the same wages.
  12. The ERC does not cover self-employed income (sole proprietors filing on Schedule C). However, wages paid to employees of a sole proprietor do count, except for related individuals. Wages paid to employees of a partnership qualify (except for related individuals again), but not guaranteed payments to partners. Wages to owners of regular corporations and S corporations with a direct or indirect ownership of greater than 50% do not count. Household employees also do not count for the ERC.
  13. The ERC is not included in income for the employer or employee.
  14. However, the IRS currently states that the amount of the ERC reduces the amount of the employer’s deduction allowed by a similar amount. Note: This matter is not settled as Congress may change this requirement and some tax professionals disagree with the IRS’ position. If Congress does not act, expect this issue to be litigated in Tax Court.


The coffee house, the perfect gathering place to share good times with friends.


Maximizing the ERC Benefit

In most cases the PPP will be a better option for the small business. However, there are a variety of issues where the ERC is either the only choice or the preferred choice. In my office I consult with a large number of business owners. In nearly all cases the result was that the PPP was the preferred route when available.

Under the PPP the owner’s wages are included. This is a significant advantage. Under the ERC owner’s wages are specifically excluded, along with wages paid to related individuals. 

Another serious issue with the ERC is determining if gross receipts are less than 50% of 2019 gross receipts of the same quarter. Early in 2020 gross receipts were probably little changed. If businesses reopen this test could be failed for future quarters as well. IRS guidance says we can claim the ERC if we later discover we would have qualified by filing an amended Form 941. However, a business should know their gross receipts shortly after a quarter end so the ERC should be taken as soon as it is determined you qualify.

But is there a claw back if the economy (and your business) have a spectacular comeback later in 2020? Not really. Once your gross receipts exceed 80% of 2019 gross receipts you no longer qualify for the ERC. Therefore, once business activity exceeds the threshold you should no longer claim the ERC.

PPP loans are forgivable in whole or in part. When consulting with clients I found that if wages would reach at least half of the PPP loan, the PPP loan was superior to the ERC. Since wages of owners are included with PPP loans it is much easier to allocate the entire loan to wages. 

If the PPP is superior to the ERC, who should use the ERC?

If you have been denied a PPP loan your next course of action is to determine if you can still get some refundable credits with the ERC. 

Another possibility where the ERC is better than the PPP is when the small business has a lot of part-time employees. Since the ERC is 50% of wages up to $10,000 — the maximum credit is $5,000 per employee — there are situations where the ERC provides a better result than a PPP loan when many part-time employees are involved. Therefore, if you have a lot of part-time employees with low wages the ERC could be the better option. The only way to determine if the ERC is better is to put a pencil to paper for your specific situation. Be aware you still need to qualify for the ERC as stated above, such as a required full or partial shutdown at any time during 2020 and gross receipts less than 50% during at least one quarter of 2020 over the same quarter of 2019.

I suspect IRS guidance will soften on many of the issues surrounding the PPP and ERC. Businesses already struggling would fail in large numbers if the IRS takes a hard line approach. I doubt Congress would tolerate such action. 

A large number of business owners have avoided the many benefits the government has offered in these trying times. The large number of choices has led to a perfect example of people’s behavior when confronted with too many choices. Even tax professionals are struggling to understanding all the different programs. Alvin Toffler’s overchoice is clearly hampering small business owners. Too many options reduces the number of businesses that will apply for any, even if they qualify. That is the biggest risk facing the American economy in 2020. If business owners shy away from programs designed to help them through these unique times more will fail, costing jobs and long-term damage to the economy and harming America’s competitiveness. 

I encourage you to discuss your situation with a competent tax professional. Yes, the IRS is still playing with the rules because they haven’t figured it all out yet themselves. But you can still plan accordingly. Whether a PPP loan or the Employee Retention Credit is best for you, you owe it to your employees, community and yourself to explore all the options.


More Wealth Building Resources

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.


Open for business.

The best opportunities in the tax code are not found in the book. Today I am going to show you how to game the Earned Income Credit (EIC) legally in a way you have never heard before. I know most readers on this blog have an income in the six figures and higher. The example I illustrate today is geared toward families with an income of $100,000 or less. Even if your income is higher you want to stick around. What I show here exposes the way I think about taxes and how I use the tax code to save my clients massive quantities of money.

The EIC has a history of fraud. Because of this the IRS watches tax returns with the EIC closely for fraud. You guys are not at risk of IRS scrutiny because you are not going to commit fraud. Right? Good. The program I outline below does not require cheating to ramp up your available tax credits. No fake income or expenses are required. We will do this all above board for everyone to see. The IRS will bless your tax return for its accuracy.

The EIC is meant to help poor families, but the credit extends all the way to $50,597 for a married couple with two children in 2017. Our example below will use this family unit to illustrate the tax benefits. When we are done you will know how to collect the EIC even if your wage income is over $80,000, or even a bit higher!

Setting the Stage

It all comes down to spending and saving. People who save get wonderful financial gifts and spenders get a bill from the IRS. Regular readers know I recommend saving half your gross income. First you fill retirement accounts and Health Savings Accounts before plowing excess funds into non-qualified accounts.

The great thing about saving half your income is the IRS pays you so much back in credits and reduced taxes that it doesn’t really hit your cash flow 50%. A small amount of self control goes a long way in building a massive net worth.

Meet our married couple Snow and Snap Pea, the proud parents of two sons. Our young couple is in their 30s and the kids are in grade school. Snow has a good job working at the Delicious Café. Snap works part-time at Beautiful Music. Their tax return is simple and straightforward. They have no other income except the W-2 wages and take the standard deduction. I’m keeping the illustration simple so it is easier to follow. Other income and deductions will change the results, but the tax reducing strategy I use here will still apply.


As you can see from the W-2s, Snow has $53,000 in wages for 2016 and Snap had $19,000. Snow has health insurance from his employer and it is HSA qualified. Both Snow and Snap have a SIMPLE IRA retirement plan available at their jobs. (Once again I am keeping this simple. There are multiple retirement plans out there with the 401(k) the most popular. I chose the SIMPLE IRA because you can contribute the first $13,000 of earned income, no percentages like 401(k) and similar plans.)

On the 1040 it looks like this:


Their combined wages of $72,000 drop down to the bottom of the page because there is no other income or adjustments to claim.


The damages are totaled on page 2 of Form 1040. The standard deduction and personal exemptions are subtracted to arrive at the Taxable Income and Tax of $5,556. You will notice our couple gets a Child Tax Credit of $2,000. There are no additional Credits or Other Taxes so they have a 2016 tax of $3,556. They over withheld on their paychecks so they get a nice refund of $1,344. Their income was too high to qualify for the EIC or Saver’s Credit.

Snow and Snap Pea are happy with the results on their tax return until they discovered The Wealthy Accountant blog. They started to wonder if this crazy tax guy was on to something. They scheduled a consultation with the Wealthy Accountant and it went like this:

Keith discovered the HSA and SIMPLE IRA availability early in the phone interview. It took some smooth talking to get Snow and Snap onboard with the max-out of the SIMPLE and Health Savings Account. Of course they were a lot more confident when they saw how it affected their tax situation in real life.



Notice each W-2 has less reported income than before in Box 1. Box 1 is what goes on your tax return to calculate income taxes. Snap has $13,000 less in Box 1 than Boxes 3 and 5. Boxes 3 and 5 is the income subject to Social Security and Medicare taxes (FICA). The SIMPLE contributions reduced the income for income tax purposes, but FICA taxes still apply. Where it gets interesting is on Snow’s W-2. He also filled his Health Savings Account from his paycheck through work. This lowered his income subject to income, Social Security, and Medicare taxes. At the end of this post we will tally the total tax savings and amounts invested/saved. (See note in comments section. Snap’s original W-2 started with $19,000, but was $16,000 on the second W-2.)


Page one of the Wealthy Accountant approved tax return looks like it was hit by a truck! Our young couple started with a $72,000 income and now only report $36,250. Wow! $36,250 is plenty to live on comfortably, but Snow and Snap do not need to worry. The IRS wants to help these poor, poor people out. The IRS has a heart of gold for people who save their money intelligently. The IRS now thinks they are poor because they tucked a large chunk of their income into their back pocket rather than spending it.


Once again the standard deduction and personal exemptions are subtracted before tax is calculated. The Peas now have a tax of $748! The Saver’s Credit is non-refundable, but they can use $748 of the credit so their total tax is zero YeeHaa!


Paying zero tax is so last year. Major corporations have done better than that when they book billions in profits. Just ask General Electric. And Snow and Snap Pea will do the same. The bottom of page 2 on Form 1040 shows why this tax return is Wealthy Accountant approved.

The Saver’s Credit is non-refundable, but the Child Tax Credit is refundable and since it was not taken above, it increases the refund here by $2,000. See that $2,932? That is the Earned Income Credit. Nice, hey? That is why we started this post. The EIC is the goal here, but there is so much more that comes along with it. The refund was $1,344 before we had a talk with our young couple. Now they have a $9,832 refund! You might be tempted to subtract $1,344 from $9,832 to arrive at a tax savings of $8,488. And you would be wrong if you did.

Time for Some Math

Snow and Snap had to give something up for the tax benefits received. They reduced their available income as follows:

SIMPLE IRAs: $13,000 each

Health Savings Account: $6,750

So Snow and Snap had to deduct $13,000 + $13,000 + $6,750 from their paychecks. $32,750. That is a lot of money. Things must be tight around the house.

Well, maybe not as much as we think. Remember the tax return showed a tax advantage of $8,488 in the form of a bigger refund. But the Health Savings Account also reduced wages subject to FICA taxes of 7.65%. This adds another $516 (rounded down) in tax savings! The real tax benefits equal $8,488 + $516, for a total tax benefit of $9,004. I told you the IRS loves you. You just need to learn their language. They have plenty of money to give away. (See note in comments section below. There was a slight change to the final tax savings.)

The family cash flow is down, but not $32,750. When you add the tax benefits back into the family budget the Peas only saw their cash flow decline $23,746. But wait for it. Your net worth went up $32,750! In effect the IRS gave you $9,004 tax free! Now where you going to get a better deal than that?

Here we have a family earning a modest, but comfortable income and turning it into a wealth building powerhouse. We didn’t even include the company 3% match added to the SIMPLE contributions.

One final thought. Doing what I outlined here is so powerful because the IRS doesn’t get you on the back-end either. SIMPLE IRAs act the same as a traditional IRA. You are taxed when you withdraw the money. You will pay tax at ordinary rates on that future date. What you will never pay back is the credits. The Saver’s Credit and Earned Income Credit are yours to keep. There is no future payback date. Just tuck it into the First National Bank of Wallet.

Now aren’t you glad you stopped by today?

Note: I checked and rechecked my numbers, but I wrote this in the middle of the night while sitting on the floor and using a preliminary 2016 tax program which arrived at the office November 30th. If you see a math error let me know in the comments. I’ll get right on it. As an accountant I’ll be the first to admit I never make a mistake.