Ultimate Tennessee Employee Retention Credit Guide

If you're among Tennessee businesses that were impacted by COVID-19, the Employee Retention Credit (ERC) serves as financial relief that empowers small to medium-sized businesses to weather the storm and emerge stronger.

However, working out the ERC in Tennessee isn’t just a walk in the park, but that’s where this guide comes in…

If you need immediate help, head on over to our ERC attorneys page for information on what our experts can do for you.

And for those who prefer self-navigation, this guide is designed to be your comprehensive, go-to resource for all things Tennessee ERC.

What is the ERC tax credit in Tennessee?

The ERC tax credit in Tennessee is a refundable tax credit for businesses that retained and paid employees during the COVID-19 pandemic. This federal initiative is designed to support small and medium-sized businesses that had to shut down due to the virus or experienced a significant loss in gross receipts.

It’s a refundable tax credit that can offset 70% of eligible wages paid to employees. For Tennessee-based businesses, this could mean a significant cost saving, potentially as much as $7,000 per employee per quarter from March 13, 2020, through December 31, 2021.

However, the labyrinthine nature of the ERC makes it a tricky subject for business owners. For one thing, it's important to understand whether your operations fall under the eligibility criteria to fully harness the benefits.

Eligibility for the Tennessee ERC

First order of business is to establish eligibility for the ERC in Tennessee. To do this, a business must satisfy 2 prerequisites:

• A considerable decrease in gross receipts: Businesses need to demonstrate either a 20% or more reduction in comparison to the same quarter of the previous year, or a 50% or more reduction compared to the average quarterly receipts over 2019 and 2020 combined.
• Impact to business operations due to government-imposed restrictions: Businesses must validate either a full or partial suspension of their operations during this period.

These conditions are not open to interpretation. A “minor” slump in gross receipts or disruption due to the pandemic will not be considered an eligible event. This goes for both small and medium-sized businesses in Tennessee, as all applicants are equally subject to these requirements.

More information on this matter can be found in our dedicated resource on ERC qualifications. 

We strongly advise a thorough review of these criteria before proceeding with your application, as failing to meet either one would render your business ineligible for the incentive.

The ERC Tennessee calculation

Assuming you’ve established eligibility for the ERC Tennessee tax credit, the next step is to determine just how much of a benefit you're eligible for.

To do that, businesses need to evaluate specific qualifying factors. This includes:

• Demonstration of an employer's efforts to overcome fiscal barriers
• Employee count remaining on the payroll during the qualified period — this should be fewer than 500 active employees (the threshold for any medium-sized enterprise).
• Additionally, the calculation involves a close examination of the qualified wages paid to employees during the period as well as a record of compliance to tax regulations.
• Any delay in filing taxes or inconsistencies in the tax return could lead to an immediate disqualification from the ERC.

From the above, the ERC calculation varies for 2021 and 2020:

Businesses eligible for the TN ERC can claim up to 70% of the first $10,000 in qualified wages per employee for the year 2021.

However, claims pertaining to the year 2020 are subject to a reduced 50% credit rate, along with a lower employee cap of 100 people.

While the credit may not entirely negate losses incurred during tough times, it can surely help lighten the burden, enabling your organization to continue operation without excessive strain.

Applying for the Tennessee employee retention credit subtraction

The first step in applying for the Tennessee employee retention credit subtraction is to fill out Form 941. This tax form is critical as it reports the employer's federal income tax withholding, along with Social Security and Medicare taxes for all employees.

As a business owner, it is essential to ensure the figures on Form 941 accurately portray the withholding for each employee throughout the calendar quarter and year. Any missteps here could result in a delay or disqualification from claiming the ERC.

The next step involves offsetting your share of Social Security taxes on wages paid to your employees between the dates March 13, 2020, and December 31, 2021. It's crucial to note that only qualifying wages may be refunded via the ERC. 

But here's the silver lining — if your business has a higher ERC credit than the amount of Social Security taxes paid during this period, the excess can be refunded as an additional tax credit. This allows you to fully maximize the benefits you receive from the ERC.

For a complete understanding of the requirements and guidelines, we strongly recommend referring to our comprehensive guide on the ERC application process.

PPP & the Tennessee employee retention credit

The Tennessee Employee Retention Credit combined with the Paycheck Protection Program (PPP) have been instrumental in providing support during COVID-19.

Here's what you need to know about claiming ERC and PPP together:

• You can claim them both! Employers who received a PPP loan under the CARES Act can indeed claim an ERC. This provides another layer of support, allowing employers to receive a credit for wages paid during the qualifying period.
• Changes to ERC Legislation: Initially, the ERC legislation did not provide a mechanism for businesses to take advantage of both the PPP loan and ERC. This policy has, thankfully, been revised, providing more options for employers.
• Exercising Caution: Despite this positive change, employers should proceed with caution. There's a potential risk of PPP loan recapture if certain conditions are met. Hence, it's essential to thoroughly understand the terms before proceeding.

Nonprofits & the employee retention credit in Tennessee 

In the state of Tennessee, nonprofits have an opportunity to benefit from the ERC if they meet two key criteria:

• Government Mandate Test: This test gauges the extent to which COVID-related restrictions have impacted the nonprofit's operations.
• Gross Receipts Test: A benchmark that assesses if the nonprofit has incurred economic hardship due to COVID-19. This test quantifies the year-over-year drop in their gross earnings.

Provided the nonprofits clear both these tests, they are deemed eligible for the Employee Retention Credit in Tennessee. This eligibility is retroactive to 13th March 2020.

Importantly, the credit extended to nonprofits is identical to what for-profit employers receive. It can be utilized towards employee retention, covering pay, benefits, or other workplace expenses.

For nonprofits grappling with financial stress, we offer a comprehensive guide on the ERC for nonprofits to help navigate through these challenging times.

Is the ERC taxable in Tennessee?

No, the ERC isn’t taxable in Tennessee. It’s not considered taxable income, much to the relief of many. This means that using this tax credit to pay out wages does not incur additional taxes. However, it's important to understand that the ERC can have implications in other taxation areas.

For instance, while the ERC wages are not directly taxed, they can influence your taxable profits, which might indirectly affect your overall tax obligation.

A common example can be seen in the case of the Transaction Privilege Tax (TPT) in Tennessee — a sales tax on services and goods sold within the state. The amount of ERC wages paid out can alter the TPT rate due to changes in taxable profits.

For a more comprehensive understanding of how the ERC impacts your overall taxation, we recommend referring to our detailed is ERC taxable income guide.

Alternatively, you can reach out to our team of skilled tax attorneys at Brotman Law for a personalized analysis of your taxation scenario.

ERC Nashville TN audits (state-wide guidance)

The prospect of ERC Nashville TN audits is daunting, even more so when struggling to recover from the pandemic's impact.

Despite its apparent benefits, the ERC, if not handled correctly, can lead to audits that are both costly and time-consuming.

However, it isn't all doom and gloom. You can greatly reduce the likelihood of being audited by:

• Adopting a comprehensive understanding of the ERC
• Only apply if you’re sure you’re eligible
• Maintaining meticulous documentation throughout the claiming process
• Consult ERC attorneys, like the team here at Brotman Law

So, while the threat of an ERC audit may be worrisome, with careful attention to details and thorough understanding of the ERC, businesses in Tennessee can navigate this issue and focus on their recovery and growth.

ERC scams to be aware of in the Volunteer State

It is unfortunate that not even the ERC was spared from scammers. As people struggling with financial hardship are vulnerable to offers for easy relief, some scammers have found ways to misuse the program.

Here are a few red flags that should help you be aware of any potential scams:

• Make sure you stay informed by only dealing with official sources when it comes to ERC related questions or enquiries.
• Do not transfer money to any third party who claims that they are able to get you a better ERC rate or benefit.
• Be wary of people asking for your personal details, like bank account numbers, Social Security Numbers, or other sensitive information. The IRS will never ask you for this information via email or phone.
• Never pay any fee or hidden costs to access the ERC.
• Never respond to any emails, text messages, calls or other online requests that you have not directly sought out assistance for ERC

To equip yourself better against these threats, visit our page on employee retention credit scams, where our experienced tax attorneys share useful insights on how to detect and avoid becoming a victim.

How Brotman Law can help you

At Brotman Law, we understand that the ERC is not a universal solution and navigating its complexities can sometimes feel akin to traversing a minefield.

Our expertise extends across the entire spectrum of the ERC, ensuring you're in safe hands. We believe that your business deserves to fully benefit from the refundable tax credit it's entitled to under the IRS guidance.

Our ERC tax attorney team is here to remove the burden from you.

Final points

As we conclude, let's shine a spotlight on the Employee Retention Credit — a financial lifeline for small and medium-sized businesses sailing the stormy seas of the post COVID-19 economic landscape.

This tax credit is designed to assist those that retained their workforce amidst economic turbulence to keep the Big Bend State going. Yet, to truly benefit from this golden opportunity, it's critical to understand the tax implications, eligibility requirements, and necessary tax documentation.

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