Employee retention credits are a type of tax credit provided by the US government in response to the COVID-19 pandemic. These credits were implemented to encourage employers to retain employees, rather than furloughing or laying them off and providing incentive to employers that are taking a heavy financial hit due to the pandemic.
In order for businesses to qualify for these credits, they must meet certain criteria such as having operations that have been fully or partially suspended as a result of governmental orders related to COVID-19 or having experienced at least a 50% reduction in gross receipts for any quarter in 2020 when compared with the same quarter in 2019.
The actual amount of credit available varies based on criteria determined by the employer and employee’s salary. Generally, it’s calculated as 50% of up to $10,000 of qualified wages paid per employee between March 12, 2020 and December 31, 2020 (or December 31, 2021 if an extension is approved). The overall maximum credit available is $5,000 per employee over this time period which can equate to savings up over $6k depending on how much qualified wages were paid (“Qualifying Wages Paid”). Qualified wages may not exceed $10k per employee during this time period thus making the max amount available equal 5k.
Employees affected must be maintained through March 12th 2021 unless an extension is granted becoming effective July 1st 2021 and lasting until June 30th 2022.
What Are Employee Retention Credits?
Employee Retention Credits are refundable tax credits that allow employers to be reimbursed for certain expenses incurred in retaining employees, during times of business downturn. These credits are available to employers with fewer than 500 employees, and can be claimed on top of the employee payroll taxes, such as Social Security and Medicare, providing a great additional incentive to keep employees on board even during hard times.
We will explain the details of employee retention credits below:
The Employee Retention Credit (ERC) is an extension of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Intended to encourage employers to keep their employees on payroll during the COVID-19 pandemic, the credit was made available to both for-profit and non-profit employers that have been negatively impacted by the crisis.
In order to be eligible for these credits, the employer must have:
- Experienced full or partial suspension of business operations due to a COVID-19 related lockdown or experienced a decline in gross receipts of more than 50% for any calendar quarter in 2020 compared with the same quarter in 2019;
- Paid qualified wages after March 12, 2020 and before January 1, 2021;
- Not received a refundable credit from FICA payroll taxes under section 2306 of the CARES act; and
- Not taken deductions for such wages paid above under section 199A of their gross income tax returns due to their size as defined in Internal Revenue Code Section 3121(b).
Employers may also be able to claim credits if they receive Paycheck Protection Program (PPP) loans, though there are specific conditions they must meet in order to do so. Applicable employers should review all restrictions carefully in order to ensure eligibility before submitting an application for credits.
Employer retention credits are calculated on a quarterly basis for each qualified employee for whom the employer qualifies. To calculate the amount of the credit, employers must first determine their qualified wages for each quarter. The IRS defines qualified wages as amounts paid to an employee for working during the applicable quarter, not including sick leave or family leave under the Families First Coronavirus Response Act (FFCRA).
After determining the total amount of qualified wages paid during that quarter, employers can then multiply that figure by 50%. This will be used as the maximum potential credit before factoring in any relevant reductions.
The actual credit taken on a quarterly basis may be reduced if either (1) the employer received a loan under section 7(a) of the Small Business Act (e.g., PPP loan) or (2) a refundable payroll tax credit was allowed for any Federal Insurance Contribution Act taxes associated with covered wages paid to any employee during same calendar year quarter. If either one of these situations applies, an additional reduction will be applied as follows:
- Reduce by any amounts that are forgiven under PPP.
- Reduce by Social Security taxes in excess of 6.2% of covered wages paid with respect to all employees during same calendar year quarter.
Once these reductions are applied, that final figure is your available employer retention credit amount which should then be claimed when filing Form 941.
Benefits of Employee Retention Credits
Employee Retention Credits (ERCs) are a valuable resource for businesses to help support their employees during difficult times. ERCs are a tax credit for employers to retain their employees and offer them additional benefits during the pandemic. This credit can help businesses reduce payroll costs and benefit from major savings.
In this section, we’ll discuss the key benefits of taking advantage of employee retention credits:
Employee Retention Credits (ERC) are incentives offered to employers by the federal government to encourage businesses to continue paying their employees during economic uncertainty. The credit helps employers maintain their employee base and gives them a substantial financial incentive to do so.
The program provides up to $5,000 in tax credits per-employee and is available for companies of any size who have faced a revenue decline of at least 20%. To qualify, companies must offer health insurance benefits or opt-in to this benefit if they hadn’t previously.
Employers are eligible for the credit if they kept their employees on payroll during 2020, regardless of whether they worked due to coronavirus-related closure of their business or otherwise. Efforts made in anticipation of the pandemic – such as boosting bonuses or pay increases – could also be applied for ERC if done within certain parameters. The benefit does not require applications and can be self-computed and applied for at time of filing taxes – within certain parameters like maintaining employee salaries over 50% from 2019 levels.
There are several top reasons why ERCs should be considered an attractive option for businesses:
- Increased employee retention.
- Reduced turnover rate.
- Increased morale among staff members.
- Improved loyalty from their customers.
In addition, these credits help businesses stay competitive in an ever-changing marketplace amidst uncertain economic times. Businesses that choose to make use of these incentives may find that not only can they reduce costs associated with hiring and training new employees but also mitigate a potential income loss during challenging times.
Improved Employee Morale
Employee Retention Credits can be a great way of fostering improved morale amongst your employees. By offering employees specific incentives that reward loyalty, team spirit, and commitment, you are not only creating an attractive package for potential new hires but you’re also nurturing a culture of appreciation and support.
Having incentives in place that recognize and reward hospitality towards existing staff, as well as those who have been with the business for a certain amount of time, serves to build connections between people and helps create strong teams that are invested in their work. In doing so, employee morale typically improves which leads to higher productivity across all areas of the company overall.
Increased Job Security
Employee retention credits can provide increased job security for your workforce, which leads to an improved morale among workers. This is because employee retention credits are designed in such a way as to help businesses keep staff during tough financial times.
Benefits of this credit include:
- Helping employee morale by providing job security when companies would otherwise not be able to afford it.
- Encouraging employees to stay with the company for a longer period of time due to the incentive offered by the credit.
- Increased job security also helps businesses retain skilled and talented employees who might otherwise be more likely to look for employment elsewhere in search of better conditions or higher salary.
- Additionally, employers who offer employee retention credits are often viewed as more attractive employers, enabling them to attract quality talent from across the country or even globe.
Best Practices for Utilizing Employee Retention Credits
Employee retention credits are a form of tax relief that allows eligible businesses to claim a credit of up to $5,000 for each qualified employee retained for the tax year. Utilizing employee retention credits is beneficial for employers who are looking to reduce their payroll costs and encourage their employees to stay with the company.
In this article, we’ll discuss the best practices for leveraging employee retention credits:
Develop a Retention Strategy
Developing and implementing a retention strategy is an important part of forming an effective employee retention credit program. In order to reduce employee turnover and reward existing employees, organizations must develop an overall plan for their employee retention program. The following are some key considerations when creating your program’s strategy:
- Know your target audience: Different methods may be needed when trying to retain different types of employees. Consider what resonates most with each generation, skill set or demographic you are looking to target for retention.
- Identify job quality problems: If possible, try to put solutions in place that will help current employees stay with the company longer. This may include expanding opportunities for career growth and development, improving onboarding procedures, or creating supportive feedback channels.
- Understand the changing nature of labor markets: Consider current trends in terms of employment workforce demands and how they can supplement (or contradict) policies you have already adopted.
- Develop a plan for recruiting new hires: Having the resources available to adequately replace lost employees is essential if you want your organization’s success to be sustainable long term. Establish training programs, contacts in targeted networks or ways to tap into specialized talent pools if needed as replacements during periods of high turnover rates.
- Assess the effectiveness of your strategies: A comprehensive assessment allows employers to recalibrate whether strategies need modification over time as industry dynamics change or economic variables fluctuate. By tracking analytics over multiple months or years, employers can more accurately gauge outcomes that are specific to their company’s culture while proactively responding to the ever-changing workforce needs in their industry niche more effectively and efficiently than ever before.
Monitor Employee Retention
Businesses that meet the qualifications for Employee Retention Credits need to be aware of their changing circumstances and identify opportunities to maximize their credits. To receive these beneficial credits, employers must keep up with changes in the laws and adjust their practices as needed.
To actively monitor your employee retention situation, two important tasks must be completed:
- Stay informed about changes in the law. This can include reading articles and sites related to new legislation or staying in contact with experts who are familiar with the relevant credits.
- Track employee payroll data and cash flow to identify patterns or key indicators that suggest where your business should make adjustments in order to best leverage Employee Retention Credits. Regularly review your Payroll records and financial reports while being aware of predictions related to customer demand, economic development, workforce planning and other business objectives.
These efforts help employers optimize their use of available resources while also maximizing any applicable Employee Retention Credits they may be eligible for. By being diligent in evaluating company data and staying abreast of applicable laws, businesses can stay ahead of potential compliance issues as well as take full advantage of potential incentives such as employee retention credits.
Communicate with Employees
Communication is key to employee retention. In order to make sure employees have the necessary information, develop channels to and from employees. This should include a regular check-in between managers and employees as well as open communication with both in regards to employment plans.
As part of the communications strategy, companies should review performance feedback with employees. This should be done regularly, at least annually or more often for less experienced workers, as employees may not be aware of any issues or shortcomings in their performance until management brings it to their attention. It is also important for businesses to get feedback from their workforce on how they perceive the organization and what ideas may help them stay engaged and happy.
Whether it’s an informal chat session over lunch or an official survey distributed across departments, getting feedback can provide a greater understanding of employee needs and help management come up with strategies that will ensure high morale and retention rates moving forward.
In conclusion, the Employee Retention Credit is a great way for businesses to claim federal tax credits while helping to retain their staff. The credit applies to wages paid after March 12, 2020 and before January 1, 2021 and is available for any employer who has experienced a decline in gross receipts since the start of the pandemic. Employers should consult with a qualified tax professional on how to best take advantage of this credit and understand any potential risks associated with it.
The IRS Website also offers more information about eligibility requirements, filing requirements and frequently asked questions related to the Employee Retention Credit.