Employee retention credit is an important benefit that is typically overlooked by most companies. You can use the Employee Retention Tax Credit (EMTRC) to assist your client’s employees in saving up to $1000 per employee per year. This tax credit is designed to offset income taxes on employee salaries and expenses to reduce the cost of attracting and keeping qualified, experienced, and productive employees.
Employee retention credit is not available to large companies or publicly traded companies with over 200 employees. Most medium-sized companies, as well as some small and sole proprietorships, are also not eligible for the employee retention tax credit. An employee retention tax credit is available to employers who paid more than $5,000 in wages to the same employee in a given tax year and at least $5,000 to an employee in each of the next three tax years.
There are several major reasons why a client’s employees are often concerned about their job security. First, not all employees have a positive outlook on their future employment. Second, not all employees have adequate financial resources to cover their future living expenses. Third, not all employees have the skills or expertise to replace themselves. In order to reduce the financial burden on your clients, make the employer’s efforts to retain and attract quality employees a top priority by taking advantage of the Employee Retention Tax Credit.
Key Points
Eligibility – There are several ways in which an employer can claim the EMTRC.
Time Qualification – The credit is available from the tax filing deadline of April 1 to the tax filing deadline of the following calendar year.
Employees Qualifying for the Credit – The credit is available to both full and part-time employees.
Employees Qualifying for the Credit – Applicants must be active employees working in the employee’s company’s regular business and who meet one of the following conditions:
- Be a member of the employer’s management team.
- Be an employee who was retained with more than 12 months remaining in the employment relationship or under a retention bonus contract.
- Be an employee retained in an executive, management or senior management position or who qualifies for a senior management position.
- Be an employee who qualifies for an executive, management, or senior management position as defined in the IRS publications.
While the EMTRC is a tax credit, it is similar to an earned income tax credit. Generally, income tax must be paid on a tax return if it is eligible for an EMTRC. This tax credit can be significant for high-income individuals and corporations. However, it can also be used by companies who are relatively small and have few employees, such as family-owned businesses.
Employee retention tax credits typically are paid quarterly. Generally, the amount of the credit is higher when you hire your clients in the second half of the year, which is March 1 to June 30 of the following year. You can use your Form 1120 to request that the credit be paid as additional taxes owed to the IRS. There is no limit to the amount of EMTRC that can be claimed by each employer.
The ETRC can help your client attract and retain qualified employees, increase productivity, improve employee morale, and increase employee morale and loyalty. However, you must utilize this tax benefit for each of your client’s employees in order for it to be effective.
How to Prepare for Employee Retention Tax Credit
To qualify for the tax credit, your client’s employees must meet the following conditions:
- Must have at least 12 months remaining in their employment relationship.
- Must have been hired in a legal and binding contract.
- Must have met the legal and contractual requirements of retention bonus or severance package that was in place when the employee joined the company.
Your client must also file and pay ETRC to the IRS, as well as for employee withholding taxes, for each employee who has qualified for the credit and incurred the tax liability.
How to Use Employee Retention Tax Credits
The IRS website has a section that explains how to claim the EMTRC, and shows how to use the online estimator tool to determine how much tax should be withheld from each employee’s paycheck. The ETRC can help your client offer employees more money, which helps keep them in their jobs.
The IRS requires that you file an employer verification return with Form 1040-ES if the employee filed a Form W-2. This shows that you are withholding enough to claim the ETRC and report employee wages on your client’s income tax return. Employee retention tax credits can be a significant tax benefit, which is why your client should consider using this tax credit to increase the value of his employees’ compensation.
How Employee Retention Tax Credit Is Helpful for Your Clients
Employee retention tax credits can be an important tool for your client, but he also needs to consider other tactics for retention as well.
- Offer financial incentives.
Many employers offer bonuses and equity in lieu of cash to their employees. If your client has more money to give than he actually owes, then he might consider paying out bonuses and equity to his employees.
Some companies, such as Google and Facebook, offer employees cash bonuses to stay on after a period of time. This is known as “grants” or “milestones,” and it typically can be used to buy things like a house or a vehicle.
- Offer a health plan.
Your client can offer health care coverage to his employees in lieu of cash compensation. Though many employees have health insurance through their employers, others may not.
- Offer vacation time.
If your client has a lot of people with short vacation times or few vacation days, he might consider increasing the amount of vacation time that he offers. This can help your client retain qualified employees who need additional time off to recuperate or relax.
- Employ a benefits provider.
This could be a benefit to your client in the long run, but it could also be helpful in the short run. To attract top talent, your client could offer to pay a portion of a health insurance deductible or copay.
- Offer performance-based bonuses.
Your client might be able to give bonuses to employees based on their performance, which may help in retaining the qualified workers who are close to retirement. If a customer or a client goes out of business, or an employee retires, your client might be able to give bonuses or incentives based on those situations.
- Buy training.
Your client might be able to give employee training to qualified employees in lieu of cash compensation. For example, if a salesperson gets an online sales certification, your client might be able to compensate him with a prize. Or, if a staff member needs to learn a new skill, your client might be able to give that employee a prize.
- Offer stock.
Your client might be able to give employees stock in the company. The grant would depend on how many shares the employee would receive, and how long the employee would hold on to the stock. If the employee is a stay-at-home mom, she might be able to hold on to her stock for a long time.
- Offer a new hire bonus.
Your client might be able to offer a bonus to a new hire who is qualified. It’s also possible that the employee will stay longer than anticipated.
This might be something that your client is already doing. It is especially beneficial for your client to offer an employee credit to workers who have worked for them for a certain amount of time. This is a way that your client can show that he cares about his employees and wants to help them save money.
- Use deductions.
Even if your client has less money than he is required to pay out, it’s still possible to give certain benefits to his employees. Your client can offer deductions for things such as employee-sponsored health insurance and transit cards.
- Transfer an employee from another department.
If your client has someone who is qualified but isn’t performing as expected, you might be able to transfer that employee to a different department. The ERC Program Manager can provide more information on this topic.
- Buy or lease a new vehicle.
An employee with an older vehicle can get an incentive to buy a new car, car loan, or lease. Many employers even lease new cars for their staff, or they might even buy new vehicles for their staff, depending on the type of job.
- Require employees to buy a new wardrobe.
A new uniform is often a perk offered to new employees, but your client might also be able to require that new employees buy a new wardrobe. This could be a helpful way to help the employees stay in touch with the latest trends in fashion and to show them that your client cares about them.
- Add a perk.
An employee may be able to get a perk that is different from what is offered to other employees. It is possible that your client could allow the employee to pick the parking spot closest to the office.
- Hold a company party.
Your client might be able to celebrate a holiday or an anniversary with his employees. If your client is not celebrating a holiday or anniversary with his employees, he might be able to hold a company party instead. It might be the perfect opportunity for your client to get everyone together for a fun event.
- Start an employee discount program.
Your client might be able to start an employee discount program, or he might be able to require that all employees participate. This perk would allow your client to reward employees for good performance.
- Set up a flexible work schedule.
If your client’s employees are able to work remotely or part time, it is possible that they can get a perk that helps them be able to work when they have the most time. For example, you might be able to require that all employees work from home on Fridays, or that all employees work remotely one day a week.
- Allow employees to work from home one day each week.
Many clients allow their employees to work from home one day per week.
- Let the employees share in the cost of buying their own phones.
An employee who spends hundreds of dollars on a phone each year might be able to share in the cost of the phone with his or her coworkers. The employee would still have to pay the full price of the phone, but his or her coworkers would chip in as well.
- Offer employees incentives for staying on top of the latest tech.
Your client might be able to offer a program to help employees learn about the latest technology. For example, if your client’s employees are searching for new job opportunities on a regular basis, they might be able to get an incentive to use a job search site each week.
- Offer a small stipend.
A small stipend can be a nice perk for your employee, since it can help them get by without having to spend a lot of money.
- Offer retirement planning support.
If your client has an employee who is retiring, you might be able to give the employee some help with their retirement planning. You can start a discussion with your client about the benefits of a tax-deferred retirement plan for your client’s employee.
- Provide a free cell phone or computer.
Many employees think that they would appreciate a phone or computer that is free. This may be true if your client is one of those clients that is unable to offer their employees a phone or computer for free.
- Give new employees a parking space closer to the office.
An employee who has been a member of the company for a long time might be able to get a parking space closer to the office.
- Offer your employee a good luck charm or a lucky charm to help him succeed.
Your client may be able to provide your employee with a good luck charm or a lucky charm to help him succeed. This could help to ensure that he does not have to put in too many hours or that he does not end up with too much work to do.
- Give your employee a vacation day to celebrate his birthday.
If your client’s employee’s birthday is during the year, he might be able to take off a day to celebrate his special day. This is a nice perk for your client, and it is a good way to show appreciation to his employee.
- Let your employee keep an important piece of work in his or her office for inspiration.
If your client’s employee is really good at what he does, he or she might be able to keep a hard copy of important project work for inspiration.
- Give a high five with a fist bump instead of an “atta boy.”
A “high five” is a nice gesture, but you might be able to get a similar reaction by giving your employee a fist bump instead.
- Give your employee a small office or cubicle that has good lighting and a comfortable chair.
Sometimes it’s nice to have a comfortable and well-lit space where your employee can work. You might be able to get your client to give your employee an office or cubicle that meets the needs of your employee.
- Give your employee a coffee mug with his or her name on it.
If your client’s employee is going out of the way to make a good impression, your client might be able to help out with a small office or cubicle gift. You can use this as a starting point to let your client know exactly what your employee would like.
There are many advantages to offering financial incentives, but it is vital that you take care of the details. Be sure to perform an in-depth benefits analysis before you offer these perks.
Why ERC Is Aren’t Enough
These tips aren’t meant to replace your employer’s efforts to help your employee succeed. It can be difficult to find the time and money to offer the kinds of perks that these tips recommend. It might also be difficult for your employer to find a good place to house the employee, and it might be hard for your employer to schedule the employee.
Although these tips can help, it’s still important to give your employee plenty of room to breathe and to be able to work. If you are having problems with your employee or your client, the best thing to do is to talk with a professional human resources or labor relations expert. They can give you guidance on how to handle the situation.
ERC Doesn’t Work for Every Employee
Unfortunately, the reality is that some employees may not see these ideas as ways to help them succeed. While it can help, ERC doesn’t work for every employee. Some employees feel that they are underpaid and that it is a waste of their time to put in a lot of effort. Others don’t see these ideas as ways to help them succeed and will rather find a new job.
Does Your Employee Appear Irritable?
You might not be able to give your employee a happy ending. You might have to deal with the potential consequences, and these consequences can mean that your employee leaves your company. In fact, research shows that people who work for companies that treat them unfairly are more likely to move to a new job within a few months. It’s a simple fact that employees aren’t going to stay in a bad situation for very long.
Unfortunately, not all employees who are underpaid are truly unhappy with their pay. Some employees simply find it hard to be happy working in an environment that is a bad fit for them. Your employee’s attitude can help determine whether ERC is a possibility. If your employee doesn’t seem interested in making an effort to work with you to find a solution, then it might be time to face the possibility that this employee is just an unmotivated slacker and move on.
Summary and Conclusions
Both tax credits are important to your clients. Many of your clients don’t know that they qualify for the tax credits. They often use the tax credits to retain their best employees or to compete for better employees. However, this does not mean that your client will automatically be successful with this strategy. The fact that your client has an employee retention tax credit does not automatically mean that it will work. The client should also think carefully about whether offering an incentive is in his best interest, and if the tax credit is the best way to improve his business.
Finally, when you see a company offering to pay its employees during the final week of the year, you should ask if they are planning to pay additional payroll taxes during the same week. You might also ask your client if his employees are part-time or full-time employees. An employee who is full-time may be able to claim the ETRC even if he is working only 40 hours per week, which is the most common number of hours an employee may claim for this tax credit.
If your client is an employee and you’re speaking to him about how to increase employee morale or how to increase his turnover, this tax credit may be one of the strategies you should discuss. Speak to an accountant or financial consultant before making any moves involving the tax credits. This will ensure that your client will be able to deduct all of the employee retention tax he wants to use, and will receive the tax benefits the tax credit is meant to provide.
Please feel free to contact me if you have any additional questions regarding the tax credits.