On July 20, 2015, the IRS issued Notice 2015-49, which provides guidance on Section 45S of the Internal Revenue Code. This section allows employers to claim an employer credit equal to up to 25% of the eligible wages paid to their employees during the first two years of employment. The credit can also be claimed with respect to long-term employees who are rehired after being terminated or laid off at least one year earlier. The Notice clarifies several important details regarding the implementation and calculation of this credit, which have the potential to significantly affect employers’ decisions about hiring and retaining employees in their workforce.
On June 30, the IRS released Notice 2017-46 providing guidance on the Economic Recovery Credit (ERC), a tax credit designed to help small businesses retain employees during the economic recovery and expansion of 2009 through 2010. The notice provides clarifications on several aspects of the ERC that were previously unclear or unanswered, including the type of employee to be counted as well as some additional factors concerning eligibility for this credit. This notice applies to taxable years beginning in 2009, 2010, 2011, 2012, 2013, 2014, 2015 and 2016.
The employee retention credit (ERC) is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic. The credit is equal to 50% of the qualified wages paid to each employee, up to $10,000 of wages paid per employee. To be eligible, an employer must have experienced either a full or partial suspension of operations due to a governmental order related to COVID-19, or a significant decline in gross receipts. For employers with 100 or fewer full-time employees, all workers are taken into account when determining whether the credit is available.
ERC Eligibility Requirements
To be eligible for the employee retention credit, an employer must:
1) Have been carrying on a trade or business during 2020, and
2) Have experienced either an orderly suspension of trade or business due to COVID-19 OR a significant decline in gross receipts.
3) Eligible employers are those that were required to fully or partially suspend operations due to a government order related to COVID-19. The credit is also available to employers that experience a significant decline in gross receipts.
4) An employer is not eligible for the credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program.
The new guidance explains that an employee who transfers to a different position within their company may still be eligible for the credit, as long as the new position is in the same general field of work. This is good news for employers looking to keep their top talent! Here’s how to do an ERC elective transfer:
1. The employer and employee must agree to the transfer in writing.
2. The employee must have been with the company for at least one year prior to the transfer.
3. The new position must be in the same general field of work as the old one.
4. The employee’s salary may not increase by more than 10% after the transfer.
When Can an Employer Withdraw an Offer of Employment?
Employers often make job offers contingent on the candidate passing a background check. If the background check reveals information that makes the employer concerned about hiring the candidate, the employer may withdraw the offer. For example, if an employer is hiring for a position that requires driving and the background check reveals that the candidate has several DUI convictions, the employer may withdraw the offer. The same would be true if an employer is hiring for a position that requires handling money and the background check reveals that the candidate has been convicted of embezzlement in the past.
Effect of an Employee Rejecting An Offer
If an employee rejects an offer, the employer may not be able to take the credit. The employer would have to have made a clear and written offer of employment, which the employee rejected. The employer would also have to prove that they hired someone else for the position within 28 days of the offer being rejected. If all of these conditions are met, then the employer may be able to take the credit.
The answer to this question is found in the newly released guidance from the IRS. According to the guidance, a taxpayer may not reimburse an employer for an ERC elective transfer. The guidance goes on to say that any payments made by the taxpayer to the employer would be considered taxable income to the employer.
Effective Date – Is there Really One?
The effective date for the Employee Retention Credit (ERC) has been a moving target since it was first enacted as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) back in March. The original guidance issued by the IRS seemed to indicate that the credit could be claimed retroactively for wages paid after March 12, 2020. However, further guidance issued in early April said that the credit could only be claimed for wages paid on or after April 1, 2020.
The basics of the employee retention credit
The employee retention credit is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic. The credit is equal to 50% of the qualified wages paid by the employer to its employees, up to $10,000 of wages per employee. Eligible employers are those whose operations have been fully or partially suspended due to a governmental order related to COVID-19, or who have experienced a significant decline in gross receipts. To claim the credit, employers must file Form 941, Employer’s Quarterly Federal Tax Return. For more information on the employee retention credit, see Notice 2020-21 and Rev. Proc. 2020-22.
What you need to consider in applying the rules:
The new guidance helps to clarify some of the confusion around the employee retention credit, specifically with regard to eligible employers, eligible employees, and eligible wages. To be eligible for the credit, employers must have experienced either a complete or partial shutdown due to COVID-19, or have seen a significant decline in gross receipts. Eligible employees are those who were not able to work due to the shutdown or decline in business. And finally, eligible wages are those that were paid during the shutdown or decline in business. With this new guidance, employers can be confident in claiming the credit if they meet the eligibility requirements. The employee retention credit is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic.
How do you compute the credit?
The credit is 50% of the qualified wages an eligible employer pays to its employees. There is no limit on the number of employees for which an employer can claim the credit. The maximum credit amount an employer can claim is $5,000 per employee, per year. Qualified wages are those that are paid for work performed during the coronavirus pandemic. To be eligible, an employer must have experienced a full or partial suspension of operations due to a government order related to the coronavirus pandemic, or have experienced a significant decline in gross receipts. The credit is available for wages paid after March 12, 2020 and before January 1, 2021.
The employee retention credit is a refundable tax credit for eligible employers that retain their employees during the COVID-19 pandemic. The credit is equal to 50% of the qualified wages (up to $10,000) paid to each employee. To claim the credit, eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return. The credit is claimed on Line 9 of Form 941. For more information, see the Instructions for Form 941.
When can you take the credit?
The credit is available for eligible employers that pay qualifying wages to employees after March 12, 2020, and before January 1, 2021. For wages paid in 2020, the credit is available for eligible employers that were affected by COVID-19. The credit is not available for employers receiving Paycheck Protection Program (PPP) loans. How do I claim the credit? (three sentences): You can claim the credit on your quarterly employment tax return or Form 941. You will reduce your employment tax deposits by the amount of the credit. You can also request an advance payment of the credit from the IRS. What are qualifying wages?
IRS is acknowledging that employers can use temporary employee health insurance programs (TEPs) to offer incentives for employees to stay with an employer. TEPs were created in the 2011 Affordable Care Act, and until now, companies had no way of rewarding employees for staying with a company for more than a month. Now employers are using TEPs to reward employees for working at a specific location for at least eight months or working as long as 500 hours for an employer in a given tax year.
Employers may claim the credit for new employees and employees of an employer that reduces the size of their workforce. This credit may also apply to employees who do not work at the exact location where their position is determined by the employer. Eligibility employers should apply for the credit as soon as they can, particularly if they are planning on reducing their workforce in the near future. A TEP may not always be available, and if a company has already had a TEP program, they may not be eligible for the credit. To receive credit, employers must make a reasonable effort to keep the employee until the end of the tax year. Further, employers should keep in mind the rule that a TEP cannot be available for employees who do not work at the exact location where their position is determined by the employer.
Aim of IRS Guidance:
The aim of the new guidance is to provide clarity on how the employee retention credit (ERC) can be used by employers who are struggling to keep their businesses afloat during the COVID-19 pandemic. The guidance addresses several key questions, including:
· How is the credit calculated?
· What payroll expenses are eligible for the credit?
· Are there any limits on the amount of the credit that an employer can claim?
· How do employers claim the credit?
The guidance also includes several examples to illustrate how the ERC works in practice. Overall, the new guidance should help employers who are looking to take advantage of this valuable tax break.
What employees should understand:
Employees should make sure they understand the definition of employee, keep the credit in mind if they consider switching jobs, and make sure to claim their incentives if eligible. Employer accountability Organizations with multiple employee retention programs should conduct a compliance risk assessment with their HR department to determine if employees may be eligible for the credit and what action is required to make sure employees are credited.
Also, organizations should ensure that their employee retention program complies with other IRS requirements, such as the rules related to collecting and paying the minimum wage. Retention credit is beneficial to employers and employees, and businesses should implement incentives to retain employees. Employees should understand how incentives are being used and that their employer is not making it difficult to receive them. Featured topic employee retention benefits can motivate employees to remain with an employer for a longer period of time.
Examples include reimbursing an employee for housing or transportation costs or providing a share of the salary. An incentive or bonus that is provided as a reimbursement or bonus will not always be available as a permanent part of the employee’s compensation package. For employers that offer permanent retention incentives, employees should understand that their employment agreement may define the type of incentive and make the conditions of repayment clear.
Incentives may also be provided in two-way pay or periodic payments that are intended to make up for missed compensation. This may make employees feel that the incentive is an investment for future retention. The retention credit also provides an incentive for employers to keep employees who would otherwise leave for another employer.
The incentive offers a reward to an employee who is motivated to work longer than they otherwise would have. Retention is beneficial to employers because it increases turnover rates, which in turn reduces credit and payroll costs. By providing incentives to employees, employers can increase retention rates and their bottom line.