26 June 2023
The purpose of the employee retention tax credit is to encourage businesses to retain key employees rather than hire new staff. The credit can be worth up to 50 percent of qualifying payroll expenses, with a cap on what qualifies as payroll expenses.
This means if you spend $2,000 per employee on employee benefits, you can get a maximum of $1,500 back from the government. But this article isn’t about how much money you can get back from the government. Instead, it’s about implementing an employee retention strategy that works for your business and the implications of including such a policy in your overall tax planning strategy. Read on to learn more and don’t be afraid to ask your tax advisor for help if need be.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a tax incentive provided by the government to encourage businesses to retain their employees during challenging economic times.
It was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in response to the COVID-19 pandemic. The aim of the credit is to provide financial relief to businesses and help them retain their workforce, ultimately aiding in economic recovery.
To be eligible for the ERTC, businesses must meet certain criteria. One of the key requirements is that the business must have experienced a significant decline in gross receipts or have been fully or partially suspended due to government orders related to COVID-19. The credit is applicable to wages paid between March 13, 2020, and December 31, 2021, making it a valuable tool for businesses navigating the challenges brought on by the pandemic.
How Does the Employee Retention Tax Credit Work?
The Employee Retention Tax Credit works by providing businesses with a tax credit based on the qualified wages paid to eligible employees.
The credit is equal to 50 percent of qualifying wages, up to a maximum of $5,000 per employee per year. This means that if you have 10 eligible employees and each earns $30,000 in qualified wages, you could potentially receive a tax credit of $150,000.
In order to determine the qualified wages, businesses must first calculate the average number of full-time employees they had in 2019. For businesses with 100 or fewer employees, all wages paid during the eligible period are considered qualified wages. For businesses with more than 100 employees, only wages paid to employees who were not providing services during the eligible period qualify for the credit.
It’s important to note that the ERTC is a refundable tax credit, meaning that if the credit exceeds the amount of taxes owed, the excess can be refunded to the business. This can provide a much-needed cash infusion for businesses struggling to stay afloat during challenging times.
What Can You Claim on Your Taxes as a Business Owner?
As a business owner, there are various expenses that you can claim on your taxes to reduce your overall tax liability. When it comes to the Employee Retention Tax Credit, there are specific payroll expenses that qualify for the credit. These include wages, health plan expenses, and certain retirement plan contributions.
Wages: The ERTC allows businesses to claim a tax credit for wages paid to eligible employees during the eligible period. The credit is equal to 50 percent of the qualified wages, up to a maximum of $5,000 per employee per year. It’s important to note that the credit is only available for wages paid to employees who are not providing services during the eligible period.
Health Plan Expenses: In addition to wages, businesses can also claim a tax credit for health plan expenses paid on behalf of eligible employees.
This includes both the employer’s share of the premiums and the employee’s share of the premiums, if applicable. To qualify for the credit, the health plan must be established and maintained by the business.
Retirement Plan Contributions: Another expense that businesses can claim on their taxes is certain retirement plan contributions. This includes employer contributions to qualified retirement plans, such as 401(k) plans or SEP-IRAs. However, it’s important to note that contributions made to individual retirement accounts (IRAs) or non-qualified retirement plans do not qualify for the credit.
By leveraging these eligible expenses, businesses can maximize their tax savings and potentially receive a significant refund through the Employee Retention Tax Credit.
Tips for Success with the Employee Retention Tax Credit
Implementing an employee retention strategy that takes advantage of the Employee Retention Tax Credit requires careful planning and execution.
Here are some tips to help you make the most of this valuable tax incentive:
1. Understand the eligibility criteria: Familiarize yourself with the eligibility requirements for the ERTC to ensure that your business meets the necessary criteria. This includes understanding the decline in gross receipts and government orders related to COVID-19.
2. Keep thorough records: Maintain accurate records of all eligible wages, health plan expenses, and retirement plan contributions. This will make it easier to calculate the credit and provide supporting documentation in the event of an audit.
3. Consult with a tax advisor: Seek professional advice from a tax advisor who specializes in the ERTC. They can help you navigate the complexities of the credit, ensure that you are maximizing your eligible expenses, and provide guidance on your overall tax planning strategy.
4.
Review your employee retention strategy: Take the opportunity to evaluate your current employee retention strategy and make any necessary adjustments. The ERTC can be a valuable tool in incentivizing your employees to stay with your business, so consider how you can leverage the credit to strengthen your workforce.
5. Stay informed: Keep up-to-date with any changes or updates to the ERTC. The government may introduce new legislation or extend the eligibility period, so it’s important to stay informed to ensure that you are taking full advantage of the credit.
By following these tips, you can position your business for success and make the most of the Employee Retention Tax Credit.
How to Apply for an Employer Matching Grant
In addition to the Employee Retention Tax Credit, another valuable resource for businesses looking to retain their employees is an employer matching grant.
Employer matching grants are funds provided by the government or private organizations that match a portion of the contributions made by a business to its employees’ retirement plans.
Applying for an employer matching grant involves several steps:
1. Research matching grant programs: Start by researching the various matching grant programs available to businesses. These programs may be offered by the government, non-profit organizations, or private corporations. Look for programs that align with your business’s goals and objectives.
2. Determine eligibility: Once you have identified a matching grant program that interests you, determine if your business meets the eligibility criteria. Each program may have specific requirements, such as the number of employees, the contribution amount, or the industry sector.
3. Prepare the application: Gather all the necessary information and documentation required for the application process.
This may include financial statements, tax returns, employee information, and a business plan. Be sure to carefully review the application guidelines and provide all requested information.
4. Submit the application: Follow the instructions provided by the matching grant program and submit your application within the specified deadline. Be sure to keep a copy of your application for your records.
5. Monitor the status: After submitting your application, monitor the status of your application. Some matching grant programs may provide updates on the review process, while others may have a specific timeline for announcing the recipients. Stay engaged and follow up if necessary.
By applying for an employer matching grant, you can supplement the benefits of the Employee Retention Tax Credit and further enhance your employee retention strategy.
Conclusion
The Employee Retention Tax Credit is a valuable tax incentive that can provide financial relief to businesses and help them retain their employees during challenging economic times.
By understanding the eligibility criteria, leveraging eligible expenses, and implementing a comprehensive employee retention strategy, businesses can make the most of this credit and strengthen their workforce.
Remember, the key to success with the Employee Retention Tax Credit lies in careful planning, accurate record-keeping, and seeking professional advice when needed. By taking advantage of this tax incentive, businesses can not only save money but also build a loyal and motivated workforce that contributes to their long-term success. So, don’t hesitate to explore the possibilities and make the most of the Employee Retention Tax Credit for your business.