Contents
Introduction
One of the initiatives introduced by the government to help businesses struggling because of the COVID-19 pandemic is the Employee Retention Tax Credit (ERTC). This credit is available for companies that keep their payroll going during 2020. It’s a way for employers to receive a tax break and cash payment when they maintain their payrolls in difficult economic times.
The objective of this article is to provide an overview of the ERTC and explain whether it’s legitimate or not. We’ll begin by discussing what it is, how it’s used, who is eligible, and provide some best practices. We will then move on to an analysis of whether this tax credit program can help employers meet their goals or if it will create additional burdens. Lastly, we’ll discuss potential risks associated with its use and suggest ways to protect your business when utilizing ERTC.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a tax incentive that was introduced by the CARES Act in 2020 to help businesses struggling with the COVID-19 pandemic. It allows businesses to receive a refundable tax credit of 50% of up to $10,000 in wages paid to each qualifying employee during the pandemic.
To qualify for the ERTC, businesses must meet certain eligibility criteria. Let’s take a closer look at the ERTC and see if it is a legitimate way to help businesses during the pandemic.
Eligibility Requirements
The Employee Retention Tax Credit (ERTC) is a refundable federal tax credit available to eligible employers who retain their employees throughout the Coronavirus pandemic. The non-refundable credit was created by the CARES Act and provides businesses with a significant incentive to bring back or maintain their payroll costs.
To qualify for the Employee Retention Tax Credit, employers must meet certain criteria:
- The employer must have been operational and had an active business at any point during 2020.
- The business must have experienced full or partial operations suspended as a result of governmental orders related to COVID-19 or had gross receipts that were at least 50 percent lower than during the same calendar quarter of 2019.
- Businesses are not eligible for this credit if they received a loan through the Small Business Administration Paycheck Protection Program (PPP).
- Eligible employers can receive up to $5,000 in tax credits per employee each quarter they are eligible for ERTC benefits.
- Businesses that employ more than 500 full-time employees do not qualify for ERTC benefits – these businesses should focus instead on other available government aid programs such as those provided through PPP loans.
How to Claim the Credit
Claiming the Employee Retention Tax Credit is a simple process. The first step is to calculate your Eligible Retention Amount (ERA), which is the amount of wages you paid during the eligible period, up to $10,000 per employee. Once you have calculated your ERA, you can use IRS Form 941-X Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund to claim the credit on your quarterly federal tax return.
When filing your return, you will also need to provide documentation from each of your employees that proves that they received eligible wages from you during the covered periods. This document should include a statement that verifies their wages and any provisions related to severance pay or other benefits provided in exchange for their continued services.
Finally, when claiming credit on your quarterly returns, be sure to include line 22a (additional income tax credits) with a notation of ‘ERTC’.
If you are unable to claim the full amount due to exceeding maximum allowable payroll taxes paid in 2020, employers may instead use Form 943 Employer’s Annual Federal Tax Return for Agricultural Employees or Form 945 Annual Return of Withheld Federal Income Tax itself to claim any remaining balance as an overpayment refundable on final 2020 returns within three years from filing date.
Pros and Cons of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit available for employers who keep their staff employed during the coronavirus pandemic. This credit can be used to help offset payroll taxes and other costs associated with retaining staff. The credit has been widely used since it was implemented in 2020, but there are pros and cons to consider before committing to the program.
Let’s take a look at the pros and cons of the employee retention tax credit:
Pros
The Employee Retention Tax Credit (ERTC) is a significant part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, aimed at incentivizing employers to keep their employees on the payroll. The ERTC can be seen as a reward for businesses that choose to retain their employees during this difficult time.
The ERTC offers significant benefits for businesses impacted by Coronavirus (COVID-19):
- A refundable tax credit of up to 50% of wages paid between March 13 and December 31, 2020, to eligible employers whose business operations have been fully or partially suspended due to imposed or mandated government closures or experienced a significant decline in gross receipts. The credit applies both previously paid and wages incurred during the relevant period.
- Employers may receive the employer retention tax relief if they continue providing health insurance benefits to those employees that are either laid off on furlough or somehow retained.
- The 2020 employee retention credit is based upon a qualified employer’s average number of full-time employees employed by them during 2019. This means that fewer total hours must be paid out in order for related employment costs to qualify as wages for ERTC purposes in 2020 versus 2019 based upon FTE count requirements.
- Funding through this tax credit alone may exceed $100 billion from 2020 through 2021, thus allowing countless businesses across America to retain hundreds of thousands of jobs they would otherwise have been forced to let go without assistance from lawmakers in Washington D.C..
Cons
Despite the stated goals of the Employee Retention Tax Credit (ERTC), there are several distinct drawbacks that should be considered when assessing its potential usefulness.
One issue is the many eligibility requirements that businesses must meet in order to qualify for this tax credit. In particular, employers must show a significant reduction in revenue to be eligible, and employees must meet certain certification criteria in order to be deemed eligible. This means that many companies may not qualify at all even though they have experienced reduced income due to the pandemic. Additionally, since this credit cannot exceed $5,000 per employee per quarter, it may not provide enough financial relief for larger businesses with higher payrolls or those experiencing more significant losses.
Another issue is that even if businesses do qualify for the ERTC, it’s important to remember that the credit only offsets taxes paid – it does not provide an actual cash flow benefit. For businesses struggling due to COVID-19 related slowdowns and shutdowns, this can be limiting when they need funds most urgently. This lack of an immediate impact in their bank accounts deprives them of their most needed support: cash on hand while they are already dealing with reduced sales or services as a result of the economic downturn caused by coronavirus pandemic measures.
Finally, because this tax credit is only effective through December 2020, businesses operating in 2021 will no longer have access to this key source of financial aid once January 1st arrives. Business owners will then likely miss out on a significant amount of assistance which could have aided their operations during the recovery period from COVID-19 restrictions and closures.
Alternatives to the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was first introduced by the CARES Act in 2020 and is due to be extended through June 30, 2021. The tax credit offers businesses with more than 500 employees a refundable tax credit of up to $5,000 per employee for wages incurred after March 12, 2020, depending on average wages paid in 2019 and overall drops in gross receipts.
However, businesses seeking employee retention solutions beyond the ERTC may benefit from some of the other options available. These often forgotten but valuable employee benefits can provide businesses the opportunity to retain their talented employees without relying solely on federal tax credits. Some of these alternatives include:
- Retention bonuses: Employers may offer bonuses to reward retention efforts or pay off indebtedness incurred during employer furloughs or layoffs
- Employer stock options/share purchase plans: Many employers are now offering stock options or securities, such as share purchase plans or allocating additional shares as an incentive for employees to stay
- Flexible working arrangements: Offer flexible working arrangement such as remote and hybrid work options, modified hours for childcare purposes; if you have multiple locations you may consider relocating rather than laying off
- Training opportunities: Investing in new methods of training can increase workforce capacity, help teams stay agile in times of change and weed out redundancy
- Enhancing 401(k) plans: Employers can add features and incentives that motivate workers to save more while receiving larger contributions from employers. In addition, employers can explore other tax-advantaged programs such as 529 college savings accounts or further savings vehicles besides the 401(k).
There are many other alternative solutions available for businesses not eligible for the ERTC or those who have reached their maximum amount of funds. Be sure to review your unique needs as a business and consult with legal counsel when making decisions concerning employee retention benefits.
Conclusion
The employee retention tax credit is a great way to help businesses during the COVID-19 pandemic. The credit can be claimed for eligible wages paid to employees in 2020 and 2021, plus a portion of employer-paid health insurance premiums. Eligible businesses must be experiencing economic hardship as a result of COVID-19— either a significant decline in gross receipts or amounts paid by the business to its employees must be severely limited—to qualify for this tax credit. Businesses that qualify can claim up to $5,000 in credits per employee each year.
For businesses that are struggling due to the pandemic and want to keep their employees on staff, the employee retention tax credit is an excellent opportunity to save money and ensure that their workforce remains as strong as possible. It’s important for business owners and their financial advisors to familiarize themselves with all of the rules associated with the credit so they can make sure everything is done properly when filing their taxes. Employers are also encouraged to carefully consider whether they are truly eligible for this tax break before taking advantage of it—fraudulent claims can result in serious consequences from the IRS!