Employee Retention Credit in 2022 is Expiring
The Employee Retention Tax Credit (ERTC) has helped families and businesses retain skilled workers in the past and will continue to be an important tax expenditure in the future. This is why the Paying Employers coalition calls on Congress to extend the ERTC for at least another decade in the tax reform bill, and why we have now been joined by several leading groups representing top talent—including the Tech Industry Council (TIC), the Society for Human Resource Management (SHRM), the National Association of Colleges and Employers (NACE), and the AARP Public Policy Institute—as well as businesses large and small, from small family businesses to Fortune 500 companies.
The ERTC is a credit that allows employers to deduct from their taxable income a portion of the wages paid to employees for purposes of retaining them, such as for a professional certification, training, or job retraining, to compensate for past employment benefits (such as company pensions), and to attract a new employee to the company. In 2017, the credit was worth up to $3,000 (as a percentage of the first $10,000 of wages), and an extra 50% of wages for each additional $2,000.
The credit will be included in the tax reform legislation currently under consideration by Congress, and has a ten-year sunset date, after which it will expire in 2022. Some in Congress have proposed to extend the credit. For example, Senator Hirono has proposed an extension of the credit for 10 years with a $1,000 cap on income level, saying, “We are home to so many families, young and old, who have spent decades in school and at work, and who deserve to be treated with dignity and respect. Now is not the time to take away tax credits that help keep American families secure.”
We understand the idea of a short-term extension, but let’s be clear: There is no shortage of talented workers or a lack of ideas on how to best train and retrain them, or to keep them from leaving, and Congress should not act in haste without bipartisan input from employers, organizations that help hire and train workers, and researchers on the best ways to retain workers. “With young Americans and many working adults facing a constant shortage of available jobs, employers need all the tools they can get to create and fill jobs, because they are in the best position to make the most of the hard-to-find talent in the country,” said Michael Favilla, Sr. Vice President of Human Resources, N.A. Caren’s.
Faced with an incoming workforce that includes record numbers of Baby Boomers and Generation Z, not to mention those from abroad, the ERTC can help employers recruit and retain a workforce that is increasingly diverse and advanced. HR pros know that top talent costs less than turnover and an HR team that brings together older and younger generations will reap long-term rewards.
AARP Public Policy Institute Report
According to a recent AARP Public Policy Institute report, “Recognizing the challenges facing America’s aging workforce, today’s older workers often have a more flexible approach to the workforce, including higher rates of switching jobs and lower rates of job retention. Today’s younger workforce, in contrast, is more likely to stay with the same employer, or seek employment elsewhere, and even more likely to be less likely to switch jobs if the switch is not voluntary.” The report cited several factors that contribute to this difference, including younger generations’ distrust of older workers, a lack of trust in older workers as mentors and role models, and difficulty accommodating a lack of patience and flexibility.
“It is imperative that we prepare the older worker of the future,” said Pamela Lloyd, director of Community Development and Health and Workforce Solutions, AARP Hawaii. “While older workers bring experience and knowledge, it is equally as important to develop the skills of our younger workers so that there are more job opportunities available. We need to create a system where we are ‘Switching Places’ to prepare for these changes.”
Time to Claim Employee Retention Credit Is Now
Retention credit is an effective tool to help employers retain valued employees. Let’s take the time to do it right. Talk to your HR folks, the human resources professional for your employer, and your CEO about a short-term extension of the ERTC so that employers across the country can apply for the credit today and retain the best workers on their payrolls. It ‘s a simple solution that helps strengthen the employment market and works for the workforce and employers alike.
These are uncertain times for America’s workers and businesses. Let’s start building a new system where we’re all ‘Switching Places,’ bringing together the new generation of workers and the older generation of workers to build a workforce and an economy that works for the good of all. It ‘s time to do this the right way and create a system that attracts and retains the best workers, and gives our employers the tools they need to succeed. You and your employer deserve it.
ERC and ERTC Workshop at the AARP Career Conference
In an effort to help employers understand and apply the Employee Retention Credit (ERC) to their organization, the ERC Coalition will hold a workshop on “Offering the Employee Retention Credit – Strategies for Success” at the AARP Career Conference, March 8, 2023. The future of work is constantly changing. This workshop will help employers understand the ERC, how it applies, and how it can be used for flexibility as an employer and as an employee. ERC specialists will share some strategies employers and employees can use to put the ERC to work for their organizations.
The ERC Coalition works with employers, employment lawyers, and financial analysts to explain the ERC and promote its benefits for employers. It was founded by AARP and the National Business Group on Health (NBGH). ERC Coalition partners include Deloitte, AARP, AARP Foundation, the National Business Group on Health, and The Joint Center for Housing Studies at Harvard University. For more information, contact Tony Giorgianni, ERC Coalition’s director of operations, at tony.giorgianni@ealove.com or (972) 400-6232.
Why ERC Is an Important Tax Deduction for Employers
The Employee Retention Credit (ERC) is a federal deduction available to employers. It provides a tax deduction to employers to help defray the cost of employee retention. In general, employers can deduct from their annual taxes a percentage of the wages paid to an employee who has worked in their company for at least one year. The ERC is a new deduction that may be included in the employer’s total payroll costs. The amount of the deduction depends on whether the employee’s wages exceed the company’s annual wages-tax exemption threshold.
If the employer’s annual wages-tax exemption threshold is $100,000 or less, the employee may be entitled to a deduction up to the statutory maximum (1099-K forms); if the threshold is between $100,000 and $138,000, the employee may be entitled to a deduction up to $24,000. If the annual wages-tax exemption threshold is greater than $138,000, the employee may be entitled to a deduction up to $32,000. The ERC is not deductible for individuals. It is only available to employers to offset payroll costs for retaining employees. It ‘s a smart way to help Employees stay on with a company.
That money doesn’t go away, and the employee’s benefits stay the same. When an employee has tenure with your company, it’s more likely the employee will stay with the company, maybe even for many years. Employees see the benefit, too. Employees who have tenure, or enough tenure, see their wages stay the same. They receive the same level of pay as they did the day they were hired, and it grows as they learn new job responsibilities and grow their experience and knowledge base.
In fact, studies show that employees who have tenure stay with their employers for longer periods of time and have better job satisfaction, so it’s a great way to stay on top of the job market. The impact is huge: Companies with more than 20 employees are estimated to save approximately $9 billion in payroll costs and $140 billion in total benefits from employer-paid retention strategies. More than 40 percent of those savings come from retention- and talent-related retention activities.
Employers Must Stay Updated on the ERC
The ERC is constantly changing in both the rules and how it applies. The Internal Revenue Service (IRS) has announced several modifications to the ERC as it applies to new benefits, new service-sector jobs, and new income levels. These adjustments include language used to determine an employee’s work-years for purposes of the ERC.
Every year, the IRS collects public comments on the ERC on its website and adopts these suggestions into the rules. This is an important opportunity for employers to be aware of how the IRS interprets the ERC, and to be proactive in evaluating their own retention- and talent-related policies.
Basic Employee Retention Policies for Hiring or Hiring New Employees
Using a degree program as an example, an employer will not have to itemize their ERC deduction if their employee has a master’s degree or higher. In fact, if the employee’s education is based entirely on his or her time spent at the employer, the ERC will be deductible as it pertains to the degree program.
Using people as a flexible concept in determining the work-years for the ERC also means that the employee’s wages and benefits will not have to be itemized as they are for paying benefits (i.e. health insurance or other health-related coverage). If the employee’s wages and benefits are not itemized, the employee can deduct up to the statutory maximum for compensation, up to $27,500, based on the number of work-years used to determine the wages and benefits.
Employers may adopt a hiring policy with a credit to an employee’s pay. If an employer has an older employee with a degree in accounting or another specific program, he can have the employee qualify for a $3,000 ERC deduction by requiring the employee to spend a minimum number of work-years with the company before retirement. That would likely satisfy the employee’s degree requirement.
One option that many employers use to help retain employees is offering health insurance to a staff member, even when that employee is not part of the payroll, as long as it’s offered at the same or a similar level as those receiving benefits from the employer. It’s a cost-effective approach that can encourage employees to remain with the company.
Now that the ERC is a factor in employment, companies can’t get caught off-guard when people retire or leave unexpectedly. The IRS’ rules are easy to understand and can help employers stay on top of their ERCs. Only 7 percent of employers say they think their ERC guidance is “compliant.” Many organizations may be unaware of the different rules for both employer-paid retention programs and employee retention incentives. As the regulation becomes more popular, companies will have to adapt to ERC information and it’s critical that they do so.
Other Employee Retention Strategies
Some strategies used to retain employees include:
- Deferred compensation for severance pay and retention pay
- Employee retention incentive programs
- Compliance training for job descriptions
- Work-to-rule bonus programs
- Conversion of part-time employees to full-time employees
- Full-year awards to incentive employees
- Work-to-rule bonus programs
Many employers may not even know the ERC exists, so the best strategy may be to read up on the regulation and use the following tips to help ensure your employees are aware of the ERC when it applies.
Benefits of Employee Retention Credit
With the ERC, employers pay the employee their full rate of compensation for the first 180 days, then it’s taxable as regular income. Because income taxes can be complex, there are a number of methods for mitigating the cost.
- Consider what the employee earns when you pay the salary, then charge the employer a reduced, or deferred, amount for the remaining months of employment. The individual must still be working for the company at the end of the first 180 days in order to qualify for the ERC.
- Consider whether to have the employee continue to work for the company for a short amount of time in order to qualify for the ERC.
- Consider the employee’s change in title, number of years with the company, new responsibilities, skills, etc. The ERC rules may reduce the amount of the payment to the employee.
- Earn your own $2,000 bonus. The ERC is calculated based on your employees’ base salary, plus overtime, but does not include pension pay or additional pay for special duties. You can increase the total compensation by adding an employee bonus for this purpose. It can be worth $3,000 to $27,500 to the employee when the bonus is $1,500 or more.
- Contributing to a 401(k) or other retirement plan and claiming the full deduction when employees make contributions will provide an additional source of tax-free income.
- If you have an employee that is spending more than 1,200 hours a year on work-related duty, the ERC will be worth $3,000, up to a maximum of $6,000. It’s not a good use of money to pay your employees for fewer than 1,200 hours a year.
- If you’re offering a 401(k) plan, you can exclude up to $18,000 from your taxable income if you contribute more than this and provide a $3,000 reimbursement for the employee. This can be beneficial, but be sure to document the employee’s individual contribution and cost.
- Offering an incentive to employees who remain with the company for one year or more may be the most cost-effective way to retain them, as employers can ensure they don’t end up paying double or even triple taxes on the cost of the ERC.
- The standard alternative to the ERC is to “do away with” the employee payment. For this approach to be workable, employees must have worked at the company for at least 6 months. Employers can continue to provide the employee payment to a part-time employee, but must deduct it from an employee’s gross income.
- The Employee Retention Credit has been in place since 2000, and is designed to “target and encourage employers to pay their employees for their work for the first 180 days.” The first ERC rate was set at 3.2%, but that was decreased to 2.5% in 2005, and 1.75% in 2010. The majority of provinces have similar ERCs for their employees.
Employer Net Income
If an employee’s salary is net of employer taxes, the employee’s income is considered “exempt.” If an employee’s gross income exceeds the amount of employer taxes, they are considered to have an “informal income.” In some cases, this may be taxed at a marginal rate. Because the average wage in Canada is considerably lower than the U.S., “further” income may be required to achieve the same amount. Some governments may grant tax credits for the employer taxes the employee was required to pay, but, typically, the unpaid portion of the tax will be applied to the employee’s net income. For these purposes, the two forms of taxation are normally combined.
Example: A worker has a salary of $80,000 and pays $35,000 of employer taxes. His net income is $60,000. A $4,000 employer tax deduction from the $35,000 of net income results in an “employer tax net income” of $25,000. If this same worker has another job, earning $60,000 in gross income, his employer would pay $2,000 in “employer taxes,” resulting in a “net employer tax net income” of $45,000. His “informal income” would increase to $70,000.
ERC Exemptions and Deductions
Employers have a wide range of options available to them in order to make their workers’ ERC payments. In addition to any employee payment deductions they elect to make, employers may also make:
- Fuel Tax Rebate.
- Training Pay.
- Incentive Bonuses.
- Property Tax Rebate.
- Employee Tax Rebate.
A few “optional” ERC payments are made by employers, such as for the employee’s “Tax-Free Savings Account” contributions, and tuition payments. Employers may also pay an ERC “in lieu of” paying the Canada Pension Plan Contributions for employees who are not eligible to make CPP contributions.
Payroll Tax Reimbursed
If the ERC is not paid, the employer must reimburse the Canada Revenue Agency for the employee payments, making them “refundable.” The first payroll tax rebates were paid in 2004.
When did the ERC Incentive come into play?
The ERC incentive is “backward-looking,” or “pass-through.” This means that a part-time employee may apply their ERC rebate immediately, based on the additional net income they are enjoying as a result of working at their current employer. For full-time employees, the rebate may be applied based on the actual wages they earn. For example, if a part-time employee is paid $30,000 in net income (net of employer taxes) from January 1 to July 30, and then only $20,000 in net income from August 1 to the end of the year, the part-time employee will be eligible to receive $3,600 in ERC rebate.
The employer may choose to apply ERC rebate to a part-time employee’s next salary tax return. Or the employer may wait to send the rebate until the end of the year, based on the part-time employee’s actual pay for that year. One thing to keep in mind is that employers do not receive the ERC rebate until they file their employees’ ERC returns, and then, only if the ERC was not paid to the employee by the employer.
Claiming ERC Is Easy
Eligibility for the ERC is often misunderstood. Some employees believe they may receive ERC rebate “in the mail,” or from the Canada Revenue Agency when it comes time to file their tax returns. However, in fact, ERC payments are made to the employer on a monthly basis, via Cheque.
Because most employers pay payroll tax in the same way, Cheque are sent out on the third business day of each month. Thus, if a part-time employee were paid in advance on January 2, and then started working for an employer after January 2, the employer would not be able to make a ERC rebate payment until they filed their payroll return on the first business day of February. This is why the Canada Revenue Agency recommends filing quarterly tax returns.