Employee Retention Credit: A Solution to High Employee Turnover
Economic uncertainty often has a cascading effect on society. First, some business owners are laying off employees as they worry about the future. This results in decreased productivity and increased hiring and training costs.
People are forced to cut spending due to the loss of income, which results in more revenue loss for businesses. That is the kind of scenario Congress aims to prevent, especially now that society is slowly trying to get back to normal after being shut down in 2020.
In response, the U.S. government introduced the Employee Retention Credit (ERC) as part of the CARES Act. The ERC served as an invaluable lifeline for countless small businesses. In addition, it became a beacon of light for failing and struggling businesses during the pandemic.
Businesses can no longer pay wages to claim their Employee Retention Credit. But they have until 2024 (in certain instances, 2025) to look back on their payroll and claim their credit.
This article will share a short guide on employee retention credit. It includes a few more valuable pieces of information related to it!
Let’s begin…
What is the Employee Retention Credit?
The ERC tax credit is available to employers who have experienced a decline in gross receipts or are forced to fully or partially suspend operations due to COVID-19-related government orders.
The ERC is claimed on the employer's quarterly payroll tax returns, and accurate records of gross receipts and employee wages must be maintained to support the claim. The credit greatly reduces the employer's payroll tax liability, up to a maximum of $5,000 per employee per year for 2020 claims, or $21,000 per employee for 2021 claims.
CARES Act – 2020
Those who qualify, including those who took a loan under the original PPP, can claim a credit for up to $5,000 per employee per year. This is against 50 percent of qualified wages paid.
Consolidated Appropriations Act – 2021
The credit for 70% of qualified wages can be claimed by employers who qualify, including PPP recipients. Further, the credit is now available for up to$10,000 of wages,per employee, per quarter (instead of the annual limitation as in 2020).
Eligibility for the Employee Retention Credit
To qualify for the Employee Retention Tax Credit, employers must meet the following criteria:
- Gross receipts: The employer's gross receipts must be below 50% of the same quarter in 2019 in 2020, or 20% in 2021.
- Business operations: The employer must have had an operating business suspended by government orders related to COVID-19.
- Time period: The credit is available for wages paid from March 13, 2020, to December 31, 2020, and from March 12, 2021, to December 31, 2021.
It is imperative for employers to carefully review the eligibility criteria and maintain accurate records to support their claim for credit. In addition, employers who meet the criteria should consider taking advantage of this opportunity to reduce their payroll tax liability and support their businesses and employees.
How to calculate employee retention credit?
Step 1: Determine eligible wages
Step 2: Calculate the credit amount: The credit amount is 50% of eligible wages paid to employees, up to a maximum of $10,000 of wages per employee for the year in 2020, or per quarter for 2021. For example, if an employer paid an employee $15,000 in eligible wages in 2020,, the credit amount would be $5,00 ($10,000 x 50%).
Step 3: Reduce payroll tax liability: The credit amount is claimed as a dollar-for-dollar reduction in the employer's payroll tax liability. The credit can be claimed on the employer's quarterly payroll tax returns.
Step 4: Maximum credit: The maximum credit amount is $5,000 per employee for 2020, or $7,000 per quarter for 2021.
Benefits of the Employee Retention Credit
Tax credits help people and businesses avoid huge tax burdens every year. Congress implemented COVID-related credits to help companies remain afloat during the struggling and uncertain economic period.
Financial support:
The ERC provides a dollar-for-dollar reduction in payroll tax liability, which can provide much-needed financial support to employers during difficult times.
Employee retention:
By reducing the financial burden on employers, the IRS employee retention credit can help retain employees. Hence, it also results in reducing the impact of high employee turnover.
Skill retention:
By retaining employees, employers can maintain their existing skill sets and reduce the costs associated with hiring and training new employees.
Increased productivity:
With a stable workforce, employers can increase productivity and efficiency, leading to better business outcomes.
ERC Relationships with Other Business Aspects:
PPP Loan Forgiveness and Other Credits
The ERC can now be claimed for PPP loans from January 1, 2021, through December 31, 2021, retroactively for 2020. The same wages used for PPP forgiveness cannot be claimed for ERC. Accounting Considerations
CARES Act and CAA provide government assistance through the ERC. ERCs are payroll tax credits not included in Accounting Standards Codification 740-10. Businesses should consult their auditors when there is no standardized guidance on applying the appropriate accounting standards to loans, income tax incentives, and credits.
Conclusion:
The Employee Retention Credit (ERC) is a rescuer for employers facing high employee turnover on accounting of financial distress from the effects of the COVID-19 pandemic. Eligible businesses can benefit with dollar-for-dollar payroll tax reduction, skill retention, productivity & efficiency, and save themselves from the ills of the high employee turnover.
Complex interplay with other tax laws makes ERC complicated for specific business requirements. You should definitely look for an expert tax practitioner that specializes in getting the maximum benefits of ERC credits.
ERC & PPP Tax specialists have helped numerous businesses in turning the pandemic tide. Book a 15 min no obligatory call with Jason Dinesen, EA. LPA, to speak on how ERC Credit experts can maximize credits for your business.
FAQs:
How can you determine if your business qualifies for ERTC?
As part of the ERTC eligibility criteria, your business will be assessed based on whether your business suffered from the COVID pandemic in 2020 or 2021. During COVID, you may have been shut down in full or partially. With this, you may have significantly declined receipts during those quarters.
How to claim the Employee Retention Credit?
To claim the ERC, the employer must file a quarterly payroll tax return with the IRS. In addition, employers must maintain accurate records of their gross receipts and employee wages to support their claim for the credit.