Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit is a provision of the CARES Act of 2020 that is designed to incentivize businesses to keep their employees on the payroll during the economic downturn caused by the COVID-19 pandemic. The credit provides a refundable employer tax credit up to $5,000 for each employee for wages paid between March 12 and December 31, 2020. This credit may be full or partially suspended depending on the employer’s size, their income level and the overall financial performance of the business.
Let’s take a look at this credit in more detail.
Definition of Employee Retention Tax Credit
The Employee Retention Tax Credit is a credit available to businesses impacted by the Coronavirus (COVID-19) pandemic. The credit helps employers keep their employees on the payroll and provides a financial incentive for employers to retain their employees. The Employee Retention Tax Credit gives businesses the opportunity to receive a dollar-for-dollar tax credit of up to $5,000 per employee over a twelve month period.
Eligible employers can claim the full amount of the credit when they do not reduce employees’ wages and hours worked due to COVID-19, or when they have not fully suspended operations during any calendar quarter in 2020 above 50% of their total operations at that location. Employers can also claim partial credits if they experience reduced operations and/or significant wages reductions.
To be eligible for this tax credit, businesses must first identify if they meet one of two applicable tests:
- Impact Test
- Wage Reduction Test
Details of both tests are available on IRS website at https://www.irs.gov/credits-deductions/individuals/employee-retention-credit
It is important for employers who qualify for this tax credit to understand all eligibility requirements and how it works, so that they can best utilize this incentive program provided by the government.
Benefits of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a fully refundable tax credit designed to help businesses that have experienced economic hardship due to COVID-19, providing employers with up to $5,000 per employee as an incentive for retaining employees who would have otherwise been laid off. The ERTC can be used for 50 percent of qualified wages paid to eligible employees from March 12, 2020 to January 1, 2021 and may be claimed for the 2020 calendar year.
Businesses large and small are eligible for the ERTC, providing the business meets certain criteria and experienced economic hardship resulting from COVID-19. Eligible businesses must employ 500 or fewer full-time employees (including part-time employees prorated by hours worked) or demonstrate a gross revenue decline in 2020 compared to 2019 of at least 20 percent or more. There are also specific requirements related to when you became aware of the economic impact due to COVID-19 and how much your revenue declined because of this event.
Benefits of claiming the Employee Retention Tax Credit include:
- Access to financial resources when they need it most.
- Cash incentives that reward loyal employees who stay at their jobs during uncertain times.
- Money savings which go directly back into a company’s operating budget.
- Making employers more competitive in the current rock bottom job market conditions.
- Honoring employee loyalty through compensation, which helps an organization retain its best talent and build loyalty within its workforce.
The Employee Retention Tax Credit is an important relief measure for employers who have been impacted by the pandemic. In order to access this credit, there are several eligibility requirements you must meet. This section will go through those specific requirements and discuss the potential implications of a full or partial suspension on accessing this credit.
In order to qualify for the Employee Retention Tax Credit, wages paid to employees during a specified period of time must meet certain criteria. Qualifying wages are defined as wages that exceed the amount computed by multiplying the number of hours that an employee is employed on average, each calendar quarter in 2020, by $10 per hour and determining the total remuneration or wages for that quarter.
For example, if an employee was employed for 20 hours on average each week for a calendar quarter in 2020 (a total of 80 hours) the employer could use $800 as the qualifying wage amount for that quarter ($10 x 80).
Wages qualifying for the tax credit must also be received after March 12, 2020 and before January 1, 2021. Additionally, employers may not claim a credit if they received a Payroll Protection Program (PPP) loan they wish to receive forgiveness or will request forgiveness in the future.
To qualify for the Employee Retention Tax Credit, employers must first meet certain requirements. Employers that have either partially or fully suspended operations due to a governmental order related to COVID-19 or employers whose gross receipts are below a certain threshold are eligible for the credit. Additionally, employers claiming this credit must be an eligible employer as defined by the Internal Revenue Service (IRS).
To be an eligible employer for the Employee Retention Tax Credit, you must meet all three of these requirements:
- Your business is currently or was previously subject to either a full or partial suspension of operation during any calendar quarter in 2021 due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; OR
- Your business experienced a significant decline in gross receipts during any calendar quarter in 2021 compared to the same quarter in 2019. A significant decline is defined as your gross receipts are below 50% of what they were in the same calendar quarter of 2019.
- You are not receiving assistance under Section 1115A “Employee Retention Credit under the CARES Act” of the Small Business Act.
Once these criteria have been met then you will be able to claim this tax credit on your income tax return when you file your 2020 taxes at the end of 2021.
In order to qualify for the Employee Retention Tax Credit (ERTC) full or partial suspension, employers must have an eligible employee as stated in the Coronavirus Aid, Relief and Economic Security (CARES) Act. This employee must meet all of the criteria established by IRS guidelines.
- The employee must be a part of a trade or business that has experienced either fully or partially suspended operations due to an at-country COVID-19 related shut down; or, if the employees’ hours are reduced due to such conditions.
- In addition to these requirements, wages used to calculate the tax credit must be paid between March 31, 2020 and December 31, 2021.
To be considered eligible for ERTC benefits, employers must have either completely closed their businesses due to pandemic related orders from a governmental authority; or they have seen significant revenue decreases resulting from COVID-19 health complications. Qualifying employers can then use wages cut due to reduced business income/closure in relation to ERTC qualifications as long as said wages fit into the established criteria.
Full or Partial Suspension of the Employee Retention Tax Credit
The Employee Retention Tax Credit was established in 2020 to provide assistance to employers affected by the Covid-19 Pandemic. This tax credit provides employers with a refundable payroll tax credit based on wages paid to employees.
As of 2021, the credit may be fully suspended or partially suspended depending on the circumstances. In this article, we will look at the full or partial suspension of the Employee Retention Tax Credit and discuss some of the implications for employers.
Reasons for the full or partial suspension
The Federal Government has provided the Employee Retention Tax Credit (ERTC) as financial assistance to businesses hit hard by the Coronavirus pandemic. The ERTC allows eligible businesses to claim a 50% tax credit for wages paid to employees between March 12, 2020 and January 1, 2021.
The full or partial suspension of the ERTC is based on important factors related to the vaccination program and economic indicators that measure recovery from the pandemic. Primary among them is progress in achieving herd immunity through vaccination efforts, consumer spending, and consistently increasing job numbers in key industries.
If there are signs of a significant reduction in COVID-related business closures and unemployment drops significantly then justification may exist for a partial or complete suspension of the ERTC retroactively as early as January 1st. This could mean that employers may not be able receive back payments on wages they paid during December 2020 but have not yet been able to claim a credit on their taxes. Some additional indications that could trigger a full or partial suspension include:
- Vaccination levels reaching 70% or greater;
- Regularly increasing job opportunities;
- Steady consumer spending;
- Brighter revenue prospects for small businesses; and
- Meeting of certain industry performance thresholds (e.g., restaurant capacity).
Impact of the full or partial suspension
The Employee Retention Tax Credit (ERTC) was created when the CARES Act was enacted to provide businesses suffering from the COVID-19 pandemic with financial support. The ERTC is a payroll tax credit that allows eligible businesses to continue to pay their employees during the crisis by offsetting part of the cost of qualified wages with a tax credit.
Under current ERTC rules, employers qualify for the tax credit if:
- They have experienced either full or partial suspension of operation due to an order by a governmental authority due to COVID-19; or
- Gross receipts are at least 50% below those taken in Jan.-Jun. 2019.
If there is either a full or partial suspension of the ERTC, businesses that were eligible must cease taking advantage of it immediately and Governmental orders may also need to be withdrawn. It is likely that in this instance more firms will suffer more heavily from the economic downturn than before, as well as reducing job retention levels amongst employers who were previously eligible for credit assistance. Reinstating possession for those who initially qualified for it may become troublesome too and red tape could ensue if companies had already put in claims or partially claimed back credits already issued by HMRC – leading to a backlog in appeals and questions regarding legitimacy and repayment. Those employers who had been released from their employee contracts due to economic necessity may struggle even further upon expanded closure periods such as those relating to hospitality sectors also resuming workplace activity meaning it will take time again before they can take back on any previous staff members as turnover decreases. Furthermore, should these effects be implemented into alternative industries then this will inevitably mean that workers’ rights become stagnant until recovery can begin once more following relaxed restrictions later down line.
Alternatives to the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a great way for businesses to keep their employees on payroll and retain them during tough economic times. However, due to the recent suspension of full or partial ERTC, businesses may need to look for other alternatives to boost employee retention.
In this section, we will explore various alternatives to the ERTC that businesses can use to keep their employees on board:
Payroll tax deferral
The Payroll Tax Deferral is an alternative to the Employee Retention Tax Credit (ERTC) offered by the Internal Revenue Service (IRS). It enables eligible small businesses and self-employed individuals to temporarily defer up to 50% of their 2021 payroll taxes until after December 31, 2021. This deferral offers businesses a temporary financial reprieve from the burden of taxes during difficult economic times.
Once established as an eligible business, this relief provides an indefinite period of time in which payroll taxes would be due at a later date. Participating employers may choose to postpone their 2021 6.2% Social Security tax payments until after December 31, 2021 and may elect the option to pay half of those taxes by then and the other half at a later date, with those payments limited between January 1 – April 30, 2023.
Additionally, when filing Form 941 for each quarter in 2021 employers are only required to report and pay 50% of the taxable wages usually reported on Form 941 through December 31, 2021 while paying 50% of those wages as “deferred compensation” on a future return without penalty or additional interest accrued. The IRS has also stated that employers may make voluntary deposits if they wish accept responsibility for payment sooner than required. It is important for employers to keep precise records for payroll tax due dates and deferred compensation amounts in order for this period of financial relief to work efficiently long-term without unnecessary penalties or additional expenses.
Tax credits for paid family and medical leave
The Employee Retention Tax Credit (ERTC) exists to help employers and employees weather the storm of the COVID-19 pandemic. But if it is not renewed, it can leave businesses without a source of relief.
Fortunately, there are other tax credits available that can provide similar incentives for businesses. One such example is the paid family and medical leave tax credit. This credit encourages businesses to offer paid family or medical leave by providing an income tax credit based on wages paid while employees take time off. Eligible employers can take up to 12 weeks of paid family and medical leave each year, with workers receiving at least two-thirds of their regular wages.
Eligible employers also receive a general business tax credit equal to 12.5 percent of the amount paid in qualifying family or medical leave, increasing to 25 percent if the payment rate is increased above 50 percent of regular wages. In addition, employers are allowed to claim a further 10 percent credit for payments made for any additional weeks beyond four per employee per year when pay does not exceed 60 percent of their normal wages during the leave period. By taking advantage of this relief, employers with fewer than 500 employees who offer flexible unpaid parental or family medical leave benefits may be able to ensure that their business can still thrive despite suspending ERTC operations temporarily or permanently going forward into 2021 and beyond.
Tax credits for employer-paid health insurance premiums
The Employee Retention Tax Credit (ERTC) provides businesses with a partially refundable credit of up to $5,000 per employee for three quarters of a calendar year, provided they keep workers employed despite the economic effects of COVID-19. However, due to recent legislation passed in 2021 that partially suspended the ERTC program before its expiration at the end of March 2021, some employers are looking for other options.
One such alternative is taking advantage of tax credits available to employers for offering health insurance coverage to their employees. Under certain circumstances, employer-paid premiums for medical care and qualified health insurance may be eligible for the Employer Shared Responsibility Payment (ESRP) tax credit. The credit can be up to 50% of an employer’s contributions toward premiums paid by their employees through the Small Business Health Care Tax Credit (SBHCTC). Eligible small businesses can also receive a tax credit worth up to 25% of employer-paid premiums through the Affordable Care Act (ACA).
The details surrounding these two potential tax credits vary depending on an individual business’s size and coverage offers. For example, SBHCTC is only available if an employer pays at least half of employee health insurance plan premiums and its annual average number of full-time equivalent workers is below 25 or it has no more than $50,000 in wages paid during the period for which it seeks an ESRP or SBHCTC. Similarly, ACA only applies if an employer offers coverage that meets certain requirements related to affordability and value as well as certifying that it meets those requirements with its IRS filing.
Given all these factors, employers should consult their financial advisors and legal counsel prior to choosing any alternatives beyond ERTC when considering employee retention via tax credits or other incentives during current economic conditions caused by COVID-19.
The Employee Retention Tax Credit has been a valuable tool for many businesses in 2021 due to the economic impacts of the pandemic. While the full credit can be claimed by eligible employers, employers may also choose to partially suspend or fully suspend the credit depending on their individual circumstances.
This article provides a conclusion on the pros and cons of claiming the full or partial suspension of the Employee Retention Tax Credit.
Summary of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax incentive designed to help employers impacted by the COVID-19 pandemic. The ERTC is provided as a refundable credit on spending associated with qualifying wages and health benefits paid during an employer’s 2020 or 2021 taxable year. Typically, the credit can equal up to 70% of covered wages, but it can be worth up to 80%, depending upon certain requirements being met.
The Treasury Department and IRS have announced that beginning January 1, 2021, employers are allowed to suspend the claiming of some or all of the Employee Retention Tax Credit for amounts incurred for qualified wages paid between January 1, 2021 and June 30, 2021. Suspension applies only if certain conditions are met including:
- The employer was not receiving shut down orders related to COVID-19 on or after October 1, 2020;
- The employer’s gross receipts compared to the same quarter in 2019 decreased by more than 20%; and
- The ERTC has not been suspended from July 1, 2020 through December 31, 2020.
Employers who qualify for this partial suspension must file Form 941-X with their return for the first quarter of 2021 reporting which eligible wages are suspended from being claimed as a credit on their ERTC. Employers may then resume inclusion of those wages in figuring their ERTC amount when filing their return for the second quarter of 2021.
Summary of alternatives to the Employee Retention Tax Credit
In the event of a full or partial suspension of this credit, employers may wish to begin exploring alternative strategies to help retain their employees. This can include offering flexible working hours, additional paid days off, enhanced work/life balance programs, and other incentives that encourage employee retention without incurring significant financial costs or taxation. Employers should also consider increasing wages and job training initiatives in order to remain competitive and attract qualified applicants in the future.
Additionally, tax credits are available from most states that support job growth through the retention of existing employees. When making decisions about employee retention initiatives, employers should take into account the wage base limits for each state as well as any additional credits available for hiring new employees.
Ultimately, businesses will find success by taking a holistic approach to understanding their workforce needs and developing a cohesive strategy for employee retention that meets their overall financial objectives.