Employee Retention Tax Credit 101 – Are you Eligible?

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As an employer, your payroll costs make up a significant portion of your weekly, monthly, and quarterly expenses. But attracting and maintaining talented employees can also pay dividends for your company in the form of knowledgeable, long-time team members. At this particular moment in history, during what some have dubbed the Great Resignation, retaining a committed workforce is more important than ever. Thankfully, you’re not alone in working to maintain your existing workforce. 

The federal government offers the employee retention tax credit (ERC) to mitigate your payroll costs in the form of a quarterly tax refund. But which of your employees are eligible? How much of their salary can you consider when claiming the credit? And how can the employee retention credit help you now? Let’s take a look.

2021 Employee Retention Tax Credit

The employee retention credit is a fully refundable payroll tax credit pertaining to wages paid in a given quarter for full and part-time employees. The employee retention credit covers up to 70% of qualified wages paid during an eligible quarter. Wages include direct compensation and health insurance paid for each employee. For 2021, the credit is limited to 70% of  the employee’s wages up to $10,000 per eligible quarter. This means an employer may claim a credit of up to $7,000 per employee, per eligible quarter.

Recently, the Infrastructure Investment and Jobs Act of 2021 retroactively ended the Employee Retention Credit to apply only through September 30, 2021 for most businesses. Employers who are considered a “recovery start-up” business may take advantage of the employee retention credit until December 31, 2021.  A recovery start-up business is a one that (1) began operating after February 15, 2020 and (2) has  average annual gross receipts of less than $1 million. 

Who is Eligible?

In order to qualify for the employee retention tax credit, employers must, in the language of the IRS, “carry on a trade or business during calendar year 2021.” For profit and tax-exempt organizations are eligible to claim the credit. The real determining factors in qualifying for the ERC, however, have to do with the pandemic-related economic hardship experienced by a 

business.

To qualify, organizations must have:

• Experienced full or partial operational suspensions during any calendar quarter resulting from  governmental orders limiting commerce for health and safety reasons throughout the pandemic; OR
• Experienced a 20% or greater decline in gross receipts  when comparing a quarter in 2021 to the same quarter in 2019.

Once either or both of these qualifying factors have been met, full- and part-time employee wages qualify for the tax credit. Unfortunately, no matter the circumstances, wages paid to contract or freelance employees do not qualify. 

Businesses that obtained a PPP loan may claim the credit if they qualify.  However, they must pay close attention to the interplay of the PPP loan forgiveness rules and the ERC rules. 

Why the Employee Retention Tax Credit is Important

If a business  meets either of the federal government’s qualifying standards for the  ERC, it could receive 70% back for every $10,000 paid in wages to qualifying employees per qualifying quarter. An  employer who qualifies could potentially receive a credit of $7,000 per employee per quarter. The credit could be substantial and  could provide much needed liquidity to a business that has been adversely impacted by the pandemic.

Unfortunately, many qualifying employers remain unaware of the employee retention tax credit, leaving money on the table and leaving the fate of their businesses in the hands of the post-pandemic economic recovery. 

If you’re uncertain whether or not your business qualifies for the employee retention tax credit, consider hiring a professional to examine the qualifications of your business, calculate qualifying wages, and submit the appropriate documentation to the government on your behalf. Doing so could mean the difference between staying in business or shutting your doors.

2020 Employee Retention Tax Credit

It should be noted that the employee retention tax credit is also available for qualifying wages paid in 2020.  The rules for the 2020 credit are slightly different.  However, it is not too late to seek the credit for wages paid in 2020. 

Ask for Help

Generally speaking, if an opportunity sounds too good to be true, it probably is. In the case of the employee retention tax credit, however, there’s no risk to simply investigating whether or not your business qualifies. If your business has experienced a qualifying hardship at any time during the 2020 or 2021 calendar years, it may be eligible to receive significant assistance. But navigating tax credits of any sort can be complicated.   

With the future of your business and livelihood on the line, don’t second guess yourself. Ask a professional to determine your eligibility and discover for yourself how much of your payroll expenses you could receive back.

Contact Aldridge Borden to determine your qualifying wages today.

Now more than ever, it’s vital that good businesses maintain good employees and contribute to the economic recovery and strength of our nation. To this end, the federal government is helping impacted businesses obtain needed funds through the employee retention credit.  To determine your eligibility, or for assistance in submitting documentation, consider calling one of Aldridge Borden’s expert CPAs at (334) 518-6413 today! Don’t leave money on the table when the future of your business is at stake.