You have undoubtedly heard or seen the various commercials and likely have even received phone calls about Employee Retention Credit, or ERC. The need for a known, reliable brand creates an excellent opportunity for community banks to help small business customers while building deposit balances. We introduced our ERC Assist program several months ago so that we can attest to the efficacy of this product. This article breaks down how you can use the ERC Assist product to generate deposits in an innovative way.

Background of ERC

ERC exists to assist businesses that were put under severe financial strain due to the government-mandated lockdowns from the 2020 COVID-19 pandemic. In 2020, the U.S. government passed the CARES Act and enacted the Employee Retention Credit (ERC). ERC gave eligible businesses a refundable tax credit of up to 50% of $10,000 for qualified wages paid per employee.

In March of 2021, The American Rescue Plan Act was passed, which made more businesses eligible, pushed back when companies had to claim the credit to the end of that year and allowed businesses to deduct 70% of up to $10,000 in qualified wages per employee per quarter. Passage of the Infrastructure Investment and Jobs Act (IIJA) retroactively eliminated the ERC for most businesses after Sept. 30, 2021.

The ERC filing deadline is October 2024. As such, like PPP, this would be a limited product for any bank.

ERC Benefits

The ERC Assist Program

SouthState has partnered with SmartBiz, a fintech company, and several known CPAs and ERC processors to assist banks in processing ERC payments for their small business customers. Community banks can now white label this same product to onboard and process employee retention tax credits for the bank’s small business customers AND prospects.

The Opportunity

The opportunity for growing deposits is substantial. Our average ERC is approximately $400k. That means, for every 1,000 applications filed, approved, and processed, a bank can obtain $400 million in deposits, of which we estimate 35%, or $140 million, are longer-term in nature. At a 4.5% wholesale average funding rate, that is approximately $18.9 million in value over a three-year average life.

While 35% of the tax credits are expected to stay as long-term deposits, the other 65% are expected to reduce liabilities, including debt, and improve the cash flow. This improves the credit position of the small business customer, thereby reducing risk for the bank.

In addition to substantial deposits and reduced credit risk, the ERC Assist product can aid in engagement making the community bank more relevant. ERC Assist provides clients with a technology platform that showcases bank innovation and demonstrates the bank is forward-thinking. ERC Assist also serves to differentiate your bank from competitors.

Currently, there are only a few established national brands processing ERC at scale (CPAs will do it for you on a one-off basis). Our group of CPAs and processors have a proven practice and have been through due diligence for information/data security. These professionals have tax knowledge, accounting expertise, and a proven track record. This expertise, combined with the technology platform and your bank’s brand, will provide a formidable position in the marketplace.

Market Overview

To give you a feel for the market, we present the following data from our experience.

  • Of your Paycheck Protection Program (PPP) customers, approximately 76% that are in good standing are eligible. Of your bank’s non-PPP, small business customers, about 55% are eligible.
  • 43% of those eligible small business customers still need to file, of which 27% would use your bank and the ERC Assist product.
  • About 85% of the tax credits are received within three months of filing, with the remainder averaging nine months.

From the above figures, you can calculate your addressable market based on your PPP and small business customers. For example, if you have 1,000 PPP customers that were eligible, then your addressable market would be 1,000 * 43% or approximately 430 customers. Of those eligible customers, 27% are likely to go with your bank. This would be 116 customers worth $46 million in deposits.

Start-Up Costs and Fees

We offer the ERC Assist product at no start-up costs, so your start-up cost is the due diligence effort to approve this product.

Currently, existing ERC firms that are potential competitors to this product charge between 15% and 40%. Most of these firms work on contingency and collect from the customer in arrears once the tax refund is received from the IRS. The ERC Assist product charges the customer in the following manner:

  • 15% for companies with ten or more employees and will pay a portion of the fees upfront, or
  • 20% for companies with nine or fewer employees or that wish to pay once the funds are received from the IRS.

Eligibility Criteria

To see if a business is eligible for the ERC, the business would first need to determine the following:

  • Was the company entirely or partially shut down due to a governmental order during any part of the quarter, or
  • The business’ gross receipts in a quarter declined more than 20% compared to either (a) the same quarter in 2019 or (b) the immediately preceding quarter in 2020 or 2021.

If the answer to either of those questions is “Yes,” and the business has less than 500 employees, then any wages paid in the quarter may count towards the tax credit of up to $26,000 per employee.

This process and eligibility are straightforward, with the only question being how to substantiate that the business was impacted. To solve this problem, our CPA and processing firms established a database of government mandates and supply chain disruptions to document COVID’s impact. This evidence is provided to a small business customer in support of their ERC filing to the IRS.

ERC Workflow

The following is a summary outline of our ERC Assist product.

  1. Determine preliminary eligibility by asking five to ten questions.
  2. If eligible, the customer would upload or validate the following:
    1. PPP application and forgiveness applications (on file from PPP)
    2. Tax form 941 (IRS quarterly wage report) (on file from PPP)
    3. Evidence of other Federal, State, or local grants or COVID assistance, such as EIDL loans (potentially on file from PPP)
    4. Quarterly financials from 2019 (if applicable), 2020, and 2021 (on file from PPP)
  3. The customer would then be provided the following completed forms to be reviewed and e-signed:
    1. Tax form 8655 (tax agent authorization)
    2. Tax form 7200 (ERC application)
      1. Tax Form 941X (Amended 941 form)

Similar to PPP, the customer would be notified via secure email at each step and would have a secure file transfer mechanism to move files.

The IRS processes quarter-by-quarter and refunds once each quarter analysis is complete. At present, refunds take between two and three months for quarters under $200,000 and up to 13 months for a larger amount due to additional review processes.

Responsibilities

The following would be the responsibilities of each party:

Your Community Bank

  • Approve the ERC Assist program
  • Provide contact information of target customers –this information will be used for no purpose other than marketing and managing the ERC effort. All related information will be returned or destroyed at the end of the product
  • Provide and/or approve all marketing efforts.

SouthState Bank & Technology Partner

  • Assist in the design and management of the process
  • Provide sales and marketing support as needed
  • Handle lockbox management and payment settlement as needed
  • Handle intermediate customer contact to support document upload and general process questions
  • Provide automation and technology to efficiently process applications and aid in the calculation of credit benefits.

CPA Firm / Processor

  • Ensure no double-counting with other employment tax provisions
  • Support customer claims with evidence
  • Approve and file the forms on behalf of the customer as an authorized tax agent.
  • Provide the customer with evidentiary support to be used in case of an audit.
  • Support customer service for specific tax and filing questions.

The Risks of Processing ERC

There are three material risks associated with this operation – headline, reputational, and operational.

The largest risk is headline risk.

Many firms have started up just for processing ERCs and have cobbled together technology and a process. We have evidenced that their pricing is substantially higher, their advice needs to be more accurate, and their approach is prone to inaccuracies. As such, the IRS has already warned about unscrupulous operators and has issued a warning (HERE). We assume that pricing, inaccuracies, and fraud will come to light in the coming years. This will raise public and regulatory questions about ERC operations.

As such, we have done the following to mitigate this risk:

  • Full transparency to the customer on fees (few competitors let you know the cost until you provide them with your information, and they complete the analysis)
  • Holding fees to 20% or below
  • Superior customer service, including completing documents for them based on the records we have
  • Consistent updates via automation so that the customer is kept informed of their status up to the point of submission to the IRS
  • Accurately calculate amounts
  • Use of known and reputable CPA firms

Outside of headline risk, there is a reputational and operating risk. The risk that we process incorrectly or with errors/delays in customer service is the next highest risk. While largely mitigated by our processing partners, the reputational risk would befall the community bank. We help to mitigate Reputational and Operational risks by:

  • Leveraging the CPA and processing firm’s experience in both tax advisory and ERC processing. (These processors are leading CPA firms by volume in this business)
  • Utilizing existing and tested ERC technology to standardize and create the most efficient process in the industry.
  • Monitoring and tracking the pipeline, ensuring expectations are achieved so that the customer gets immediate email contact upon submission and a manual contact, if needed, within 24 business hours. ERC application processing is targeted at two weeks or less. We load balance so that each ERC processor has a steady but not debilitating volume.

Additional Services

SouthState is ready to provide the following additional “add-on” services should the community bank desire.

Lockbox: The customer receives checks from the IRS directly. As such, there is a 10% delinquency rate (past 30 days) and a 2% default rate. While these are manageable numbers, to mitigate fee repayment risk, we suggest the utilization of a lockbox that the community bank (if they have the capability) or SouthState can provide.

Marketing: SouthState is ready to provide marketing materials AND prospect customer data at $0.50 per prospect for new customer acquisition.

Next Steps To Use ERC Assist

If your bank is looking to build deposits and provide additional services to your small business customer, white labeling the ERC Assist product is an easy and efficient way to do this. We have a proven process, and combined with your bank’s brand, customers will not need to turn to a newly-formed ERC shop or one of their other professionals.

If this program is of interest to you, please get in touch with ERCInfo@southstatebank.com or contact Chris Nichols at 925-202-8944. From there, we can schedule a presentation.

Tags: Published: 03/22/23 by Chris Nichols