Understanding the Retention Credit: Employees, Profits and Avoiding Losses
As Senators push for reconsideration of a bill that would allow businesses to claim the Retention Credit in the fourth quarter of 2021, others are preparing their accounting statements in order to file for much-needed tax relief. According to research, an estimated 23,000,000 small businesses owners from multiple sectors are due to file a tax return this season with approximately $1.9 trillion in funding going to pandemic efforts.
Businesses that are still in the midst of recovering from these unprecedented times are eligible to receive prior payroll costs, including employer-paid healthcare premiums as long as they meet the range of requirements over the past three years. Although your company may qualify to receive retention credit, understanding the impact that it can have on your business can help you avoid a disastrous outcome. Reaching out to one of our qualified tax specialists will ensure that your business is rewarded by getting you the maximum stimulus that you qualify for.
What is a Retention Credit?
The Retention Credit, formally known as the Employee Retention Tax Credit was instituted by Congress as a part of the Cares Act in early 2020 in response to the Coronavirus pandemic sweeping the nation. Originally passed in order to allow small businesses who counted 100 employees or fewer during the year, it provided the ability to keep their staff under payroll while offsetting some of the expenses in the form of a payroll tax credit.
The initial enactment of the credit was highly successful however it lacked the capability to include many other businesses that saw plummeting sales numbers in addition to high employee turnover due to the onslaught. This prompted Congress to expand the credit via the American Rescue Plan Act of 2021, and again with the Infrastructure Investment and Jobs Act of 2021. As a result, thousands of business owners, non-profits, and large companies were provided the option to take advantage of the opportunity to salvage their own establishments.
How Does the Retention Credit Work for Payroll?
The retention credit works by providing a portion of qualifying wages to employers who were forced to stretch their budgets in order to retain most or all of their employees through the third quarter of 2021(fourth quarter of 2021 for recovery businesses).
These funds go against the employer’s tax liability in each sales quarter for which you experienced a reduction of revenue of a minimum of 20 percent over the previous year during an identical time frame. Not limited to one specific business period, the payroll credit can essentially be claimed multiple times over each individual year.
It is important to note that although the payroll requirement is a primary marker, there are many additional criteria that must be met in order to receive a full retention credit on your business tax refund.
- Small employers must not have more than 500 employees
- Payroll expenses must be qualified(not belonging to relatives, owners, or those holding more than 50% of company stock)
- Wage eligibility for the credit cannot exceed set guidelines regardless of the year claimed
- Funds or credit received as an advanced payment must be within 70% of 2019 qualifying wages
At ERTCFiling.com, we have a fully trained staff with years of combined experience in spotting any possible irregularities that may affect your company from meeting these requirements.
How is the Retention Credit Calculated?
Calculation of the Retention Credit is based on quarterly wages of employees who qualify over an extended period of time. During the fiscal year 2020 businesses who meet the required criteria are eligible to receive up to half of the first $10,000 of each qualifying employee’s wages. This amount increases for the second year by twenty percentage points to 70% of the first $10,000 in qualifying wages. The credit provides up to $28,000 per employee for the second year and $33,000 when it’s claimed for both years.
For companies that are considered a recovery business, the allowance increases to $100,000 for the third and fourth quarters of 2021. Although special provisions allow for additional funds in instances where a proven wage reduction of over 80% occurs.
Does the Employee Retention Credit Have to Be Paid Back?
One of the primary incentives for claiming the Employee Retention Credit is that there is no requirement to repay the monies received (withstanding special circumstances) due to its status as a refundable tax credit as well as being a part of the federal stimulus package.
As an additional safeguard against unexpected losses year after year, the credit serves to effectively speed up recovery as companies are providing unprecedented incentives to re-strengthen their workforce.
Although there are many benefits to claiming the retention credit for your business, there are circumstances where it may not be as beneficial to apply for the credit. Our experts at ERTCFiling.com can assist you in determining whether the Employee Retention Tax Credit would be an appropriate fit for your tax situation.
Pros
- Reimbursement of up to 70% of qualifying wages in 2021 with additional funds for multiple years
- Offsetting of revenue losses due solely to the pandemic
- Reduction in tax liability dollar per dollar in some cases
- Additional profits for recovery businesses
- Extended eligibility for PPP recipients
Cons
- Credit only applies to certain payroll parameters
- Increased funding only provided for recovery businesses
- Annual maximums capped at $28,000 per employee
What Happens if You Receive An Overpayment?
As of late fall, the government retroactively canceled the payroll tax credit for businesses who would have been otherwise eligible for the fourth business quarter of 2021. The passing of the bill in addition to the confusion of changing payroll percentages resulted in recurring instances of overpayments. This prompted many companies to quickly rearrange their required tax deposits for payments such as for Social Security, FICA, and unemployment taxes.
The Internal Revenue Service subsequently added provisions for those who may have inadvertently received funds in excess of what would have been normally deemed eligible. If you have received an overpayment notice then the advice of a trusted tax advisor can help you navigate a reduction in possible penalties.
Conclusion
Several changes have taken place since the initial passing of the Employee Retention Tax Credit was first instituted. More than $13 billion dollars has been successfully claimed as of the onset of the tax season. If you are exploring options on filing your business taxes then speak with one of our qualified tax professionals today.