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It’s no secret that retaining employees can be a challenge for businesses. In today’s competitive marketplace especially, good employees are in high demand, and it can be difficult to keep them from jumping ship to a competitor.
Plus, replacing an employee often is not a fun task. Not only do you have to go through the hassle of finding new staff, but you must also pay for their training and get them up to speed with your company culture. All of this takes time and money—two things that your business might not have a lot of.
Even if you do have the time and money to invest in a new employee, there’s no guarantee that they’ll work out. In fact, statistics show that the average employee only stays with a company for 4.1 years. And depending on the position, it can cost up to 6 to 9 months of that employee’s salary to replace them.
It’s no wonder, then, that employee retention is a top concern for businesses of all sizes. Unfortunately, the emergence of COVID-19 made keeping employees on payroll all the more complex. Government shutdown orders, capacity limitations and reduced demand for services caused many employers to have to furlough or lay off their staff. Luckily, in 2020 the Federal government established the Employee Retention Credit to reduce the financial burden on businesses with payroll affected by the pandemic.
What is Employee Retention Credit?
The Employee Retention Credit (“ERC”) is a refundable tax credit for eligible employers that retained their employees and paid them qualifying wages during the COVID-19 pandemic.
This credit was created by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) to cushion the blow of the pandemic for employers and to help them keep their employees on payroll, or to subsequently compensate them for doing so.
The credit is available to employers – including nonprofits – of all sizes and in all industries, with the exception of governmental entities that are not educational or medical institutions, whose operations were affected by a governmental order or whose gross receipts dropped significantly.
For tax year 2020, the available credit is limited to 50% of up to $10,000 of wages (including eligible healthcare costs paid by the employer) per employee. For tax year 2021, the credit increased to 70% of up to $10,000 of eligible wages paid for each employee per quarter for the first three quarters. This means that you can claim a total of $26,000 per eligible employee across both years.
How to Qualify for the Employee Retention Credit
To be eligible for the employee retention credit, an employer must:
- Have carried on a trade or business in 2020 and/or 2021
- Have been fully or partially suspended due to a government order related to COVID-19 (this includes orders to close businesses or limit operations due to the pandemic), OR
- Have experienced a significant decline in gross receipts for any calendar quarter in 2020 or 2021. For tax year 2020, a “significant decline” is defined as a 50% reduction as compared to the respective quarter in 2019. For tax year 2021, the definition loosens to those who experienced a 20% decline as compared to the respective quarter in 2019. If an entity was not in existence as of a quarter in 2019, an alternate quarter may be elected
If a business meets the governmental order or gross receipts tests for a quarter, it is considered an “eligible employer” for an entire quarter. However, if qualified due to governmental order, only wages paid during the period of shut down will be qualified. If a business was unable to operate due to its suppliers or customers being shut down by governmental orders, it may also qualify under this rule.
Once it is established that an employer is eligible for a quarter, qualified wages must have been paid. Qualifying wages are defined as:
- Large eligible employers
- Wages paid to an employee relating to time he or she was unable to work (unproductive time) during an eligible calendar quarter, which do not overlap with certain credits claimed/received
- Must not exceed amount employee was paid for equivalent work in the 30 days prior to the calendar quarter (this rule was rescinded for 2021)
- Does not include amounts paid to employees for paid time off for vacations, holidays, sick days and other days off
- Small eligible employers
- Wages paid to employee during an eligible calendar quarter, which do not overlap with certain credits claimed/received
- Includes amounts paid to employees for paid time off for vacations, holidays, sick days and other days off
“Large eligible employers” are defined as those who averaged more than 100 employees in 2019 (for credits related to tax year 2020) or 500 employees (for credits related to tax year 2021). “Small eligible employers” are defined as those who averaged less than 100 or 500 employees in 2019 for the same.
How to Claim the Employee Retention Credit
The employee retention credit can be claimed on your business’s quarterly payroll tax return. And unlike other tax credits, the credit can be refunded to your business if it exceeds your payroll tax liability.
If you’re a small business owner who pays quarterly taxes, you can claim the credit by filling out Form 941, Employer’s Quarterly Federal Tax Return. There, you will need to include information about your business’s eligibility, as well as the amount of wages paid to employees and the number of employees on your payroll.
If you have already filed your quarterly payroll tax return, you can still claim the credit by filing an amended return.
What’s the Due Date for Applying?
The CARES Act originally established the employee retention credit for qualified wages paid from March 13, 2020, through December 31, 2020. But the Taxpayer Certainty and Disaster Tax Relief Act modified and extended the Employee Retention Credit, adding six more months— January 2021 to June 30th, 2021. Section 9651 of the American Rescue Plan Act (“ARP”) extended the ERC further through December 31, 2021, but the Infrastructure Investment and Jobs Act (“Infrastructure Act”) retroactively rescinded the credit for Q4 of 2021 except for Recovery Startup Businesses.
Although the ERC period’s deadline (for most) is October 1, 2021, you may still apply for the credit in 2022 if your business qualifies.
What is a Recovery Startup Business?
Section 3134 of the Internal Revenue Code (the “Code”) establishes “recovery startup businesses” as a third category of employers that are eligible for the ERC in Q3 and Q4 of 2021. The Code defines a recovery startup business as an employer who began operations after February 15, 2020, whose gross receipts were less than $1,000,000 for the 3 prior taxable years, and who was otherwise ineligible for the ERC due to the gross receipts or governmental order tests. The Infrastructure Act removes the final requirement for Q4 of 2021.
A Recovery Startup Business is allowed a credit of $50,000 for each of the third and fourth calendar quarters of 2021. This brings the total credit that a business may claim up to $126,000. With the addition of this rule, it is easy to see how beneficial the credit may be.
How Gulla CPA Can Help
The employee retention credit can be a valuable tool for businesses impacted by the COVID-19 pandemic. But it’s important to note that the credit is complex, and the eligibility requirements can be confusing.
At Gulla CPA, we can help you navigate the rules and regulations surrounding employee retention credit and ensure that you take advantage of all the opportunities available to your business. We’ll work with you to understand your unique situation and help you determine if you are eligible for the credit.
Whether you’re a small business owner or a large corporation, we can help you take advantage of the employee retention credit and get the most out of your tax return. Contact us for a free inquiry.