Unlocking employee retention credit: A Guide for Accountants
employee retention has always been a crucial concern for businesses, but the pandemic has further highlighted its significance. With the sudden economic downturn and severe financial strain caused by the ongoing global crisis, companies are faced with a pressing need to retain their valuable employees. To assist businesses in this endeavor, the government has devised the employee retention credit (ERC) as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, offering financial relief and incentives to retain employees. This guide aims to provide accountants with a comprehensive understanding of ERC, ensuring that businesses can effectively unlock its benefits.
What is the employee retention credit (ERC)?
The ERC is a refundable tax credit designed to provide financial relief to businesses that have been adversely affected by the pandemic. It allows eligible employers to claim a credit against their share of Social Security taxes for wages paid to eligible employees. The credit can be claimed on a quarterly basis and can be applied against employment taxes or deposited as a refund directly into the employer’s bank account.
Who is eligible for the ERC?
To qualify for the ERC, a business must satisfy one of two categories:
1. Businesses fully or partially suspended due to government orders: If a company’s operations have been fully or partially suspended by a governmental authority due to COVID-19, it meets the eligibility criteria.
2. Businesses experiencing significant revenue decline: If a business has experienced a significant decline in gross receipts, it may still qualify for the ERC. The decline is deemed significant if it has experienced a decrease of at least 50% in gross receipts compared to the same quarter in the previous year. Once the gross receipts for a quarter exceed 80% of the same quarter’s gross receipts in the previous year, the business is no longer eligible for the ERC starting from the next quarter.
Calculating the ERC:
The ERC is calculated based on the qualified wages paid to eligible employees during the designated period. The designated period varies based on the eligibility category. For businesses fully or partially suspended, the designated period is the entire suspension period. For businesses experiencing revenue decline, the designated period is counted from the first full quarter after gross receipts decline by at least 50% until the quarter when gross receipts exceed 80% of the corresponding quarter in the previous year.
The maximum credit amount is 50% of qualified wages (including certain health care costs) paid to each eligible employee, up to a maximum of $10,000 of wages per employee. This means that the maximum credit per employee is $5,000.
How to unlock the ERC benefits for businesses?
As an accountant, your role is crucial in helping businesses unlock the full benefits of the ERC. Here are some key steps to guide your clients through the process:
1. Assess eligibility: Carefully evaluate whether your clients’ businesses meet the eligibility criteria, taking into account both the suspension and revenue decline categories.
2. Calculate qualified wages: Determine the qualified wages for each eligible employee during the designated period. Ensure that the $10,000 wage limit is not exceeded per employee.
3. Keep detailed documentation: Maintain accurate records and documentation to support each step of the calculation and eligibility determination. This will be crucial in case of any future audits or inquiries.
4. Claim the credit: File Form 941, the Employer’s Quarterly Federal tax Return, to claim the ERC. The credit can be taken against employment taxes due, or if eligible, it can be claimed as a refund.
5. Stay updated: Stay informed about the latest updates from the Internal Revenue Service (IRS) and other official sources to ensure compliance with any changes or adjustments to the ERC program.
Conclusion:
The employee retention credit has been instrumental in providing financial relief to businesses during these challenging times. As an accountant, your expertise is vital in unlocking the benefits of the ERC for your clients. By assessing eligibility, calculating qualified wages, documenting accurately, and promptly claiming the credit, businesses can retain their valuable employees while successfully navigating the economic impacts of the pandemic.