A new tax credit, “the employee retention tax credit”, is available to employers who retain employees in 2021 and 2022. The credit is designed to encourage employers to offer higher wages, better benefits or other incentives to help them keep their best employees.
The tax credit can be used by employers who have been in business for at least three years, have fewer than 50 full-time equivalent employees at the beginning of the year and whose average annual gross receipts are less than $15 million. The credit is 20 percent of the amount paid or incurred by an employer during the taxable year for employee compensation (including wages, salary, bonuses and equity-based compensation) over $1 million if an employer does not use an employee retention plan. The maximum credit per employee is $2,500 per year.
The credit is reduced by 20 percent for each percentage point that the average annual gross receipts of the employer exceed $15 million. The credit is available for the year in which an employer retains at least 20 percent of its full-time employees from the beginning of the previous year to the end of that taxable year. For example, if an employer does not retain any employees at all during a given year and hires back at least 20 percent of its full-time employees by December 31, it can claim the credit for that year.
Who Can Claim ERTC?
An employer can claim the ERTC if it is a for-profit business that has 100 or fewer full-time employees and meets certain eligibility requirements. This includes businesses that are taxed under the entity classification rules of Subchapter S, C Corporations, or Limited Liability Companies. It also includes employers who have been treated as corporations but whose tax status changed during the year.
To claim the credit, an employer must have had a written plan in effect during the year that provides for at least two weeks of paid family and medical leave. The plan also may provide for paid vacation, personal leave, or other types of paid time off. The plan must be made available to all eligible employees.
Conclusion
As you can see the employee retention tax credit is a very useful tool for employers who are trying to keep their workers. However, it’s important to understand the rules surrounding this credit so that you can take advantage of it.
