The Employee Retention Credit is not a new tax credit. However, it is new to workers who may be affected by the credit in 2021. The tax law recognizes that reducing turnover rates helps employers. The Employee Retention Credit helps employers continue to hire and retain valuable employees. The Employee Retention Credit could affect employment rates, productivity, recruitment, turnover, and loyalty.
Retention rates are important to business because they directly impact company success. If you are not able to retain and attract high quality workers, your business will suffer. Here are some reasons why retaining and attracting talent is important for your business:
- Thriving and effective work teams will benefit your company.
- Employees are loyal to their employer.
- Employees are far more likely to stay and succeed if they are happy and well compensated.
- Consistently keeping the highest quality employees is key to business success.
How to Prepare Now
Tax rules about the Employee Retention Credit are confusing and challenging. Fortunately, Congress has passed an amnesty to make filing simple for businesses that missed the February 24, 2017 effective date. The amnesty allows businesses to file an amended 1099-MISC for employee withholding statements that were not timely filed. All the information is needed to avoid potential penalties for the underpayment. The recent tax reform bill has added a bonus for business. The extension of the Child Tax Credit, means that more employees may be able to take advantage of the credit.
How to File for ERC in 2022
To make it easier, file your 2022 business 1099-MISC early. Below is an outline to help you get started.
Step 1: First, download the Form 1099-MISC filed electronically by your business.
Step 2: Next, check your 2017 employee withholding statement for any that was not filed. The form will show your withholding, and any that was underpaid. You can then amend the withholding form for the 2021 and 2022 tax years.
Step 3: At this point, most businesses will need to change the Form 1099-MISC to reflect the 2018 and 2019 withholding amounts. There is an online form to help you do this.
If you need help, speak with your tax professional. They will assist you through the process.
How do you calculate the bonus for hiring or retaining workers?
Step 1: Calculate your wage and payroll taxes based on the employees’ tax withholding for 2018 and 2019.
Step 2: For this calculation, make sure to include all exemptions for your employees (employee health insurance, Social Security, unemployment insurance, and others).
Step 3: For this calculation, make sure to include state taxes based on the state your business operates in.
Step 4: Then, add up all the 2017 taxes and add a 50% bonus to cover the net.
Step 5: Make sure to use the company’s average taxable wage figure from the 2017 income statement (Form 1099-MISC).
At this point, business owners should have a total liability for wage, payroll, and sales taxes. To be safe, it’s best to consult your tax professional before filing the form.
If You Want to Play With the Tax Rules for Employees
The ERC bonus is not only important for companies to maintain employees, it also can be used to change some the requirements of employees. For example, your staff members can qualify to work from home (WFH). It is important to first consult a qualified tax professional to know the specific rules. The National Association of Self Employed (NASE) has specific information on the differences in the treatment of WFH, telecommuting, and the ERC.
Communication – make sure you communicate clearly with your employees and use the right communication channels to ensure they are informed of the bonus.
Rewards – it is not always easy to find the money in the budget for paid time off, raises, bonuses, and other incentive programs. Be creative and use the ERC for ways to reward your employees and reward them for staying.
When to Use the Employee Retention Credit and ERC Bonus
Using the ERC bonus has many tax and legal advantages. It may also be the best solution for employees. However, if you have poor communication and do not use the bonus as a way to reward employees, it may have some tax consequences.
The IRS has a few rules when it comes to the ERC:
- If you have WFH employees who have no normal office hours, you should consider using the credit towards their WFH hours instead of having them calculate the ERC.
- Employees who already work WFH (telecommute or the like) will receive the full ERC of the $4,000 if they have more than $5,000 in wages.
What if You DO NOT Pay Yourself?
There are several tax considerations if you don’t pay yourself at all. You will want to speak with your accountant for more information. If you do pay yourself, consider using the ERC and use it to increase your retirement plan contributions. This can be a great way to make sure you save in a tax-advantaged account. And, it’s usually easier to save for the future if you know you can also benefit from increased retirement benefits later in life.
Final Thoughts
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FAQs About How To File Your Employee Retention Credit in 2022
- I already have this number in my yearly tax return. Can I get it again in 2022?
If you have already been using the ERC for employees, you may not need to file the form at all. Your total income for tax year 2017 will generally be your total salary or wages. If you have more than $6,000 in wages, the ERC may be enough for you. You may also want to consult with a qualified tax professional to make sure you are not paying more tax than you need to.
- Can I qualify for the ERC if I make only $6,000 a year?
No. The ERC is limited to income up to $157,500 for individual tax return filing and $315,000 for joint return.
- Does the ERC refund money?
No. Your refund is based on the amount you were eligible to claim from the previous year. However, you do have the option to request a pro-rata refund.
- What if I earn more than $157,500 and don’t meet the ERC requirements?
If your earnings exceed $157,500, the IRS will consider you a higher wage earner and will not apply the ERC to your taxes. But, if you meet the minimum requirements, the ERC is still available. Check out our post on how much to earn to make the maximum ERC refund.
- Can I deduct the ERC?
No. The IRS does not provide a tax deduction for the ERC. However, you may want to consider a non-deductible fringe benefit. You can find more information on how to do that on IRS.gov.
- Do I need to collect all the paperwork?
Yes. You will need your W-2 form from all your employees, as well as W-2 forms from your client for any business deductions they make to your company. You will also need W-2 forms from the company that pays you for providing your services.
- What if I am under audit?
If you are under audit, the IRS may refuse to refund your ERC. You will need to pay the difference. But, if you are finished with the audit process, you can request a refund.
- Will the ERC reduce my adjusted gross income?
No. The ERC may increase your adjusted gross income (AGI), but the IRS does not consider it to be a tax deduction.
- Can I claim my ERC for the 2019 tax year?
Yes. You have until Jan. 31, 2019 to use the ERC for the 2018 tax year. But, the IRS has not yet issued a refund schedule for the 2019 tax year. The ERC may not be available for many taxpayers until 2023.
- How much do I need to be paid by my company for the ERC to be applicable?
Your W-2 forms will tell you the number of hours you worked in 2022. If you meet the requirements, you can deduct 20 percent of the hours you worked to determine the percentage of income you are eligible to receive.
- Is there a limit to the number of ERCs I can claim in one year?
No. You can claim the ERC for up to four years. You may only claim the ERC for the entire year if you meet the requirements.
- Can I claim the ERC on my taxes when my company makes its annual K-1 form?
You cannot. It must be claimed on your individual tax return.
- Can I use the ERC if I am not an employee?
Yes. The ERC can be applied to self-employment income only.
- Can I claim the ERC on a joint return if I was paid by a corporation?
Yes. You can claim the ERC when you work as an independent contractor for a non-corporate corporation. You can also claim the ERC when you work for a commercial business but are not an employee.
- Can I claim the ERC if I don’t own a business?
Yes. You can claim the ERC if you are in the military, or have a job that requires a significant amount of education or training.
- What if I lose my job or can’t work?
You can still claim the ERC if you are a dependent child or someone with a disability. It is not necessary to meet the requirements.
- Can I claim the ERC if I already get a refund?
No. You will not receive a refund for claiming the ERC on your taxes if you receive a refund in any other way. The ERC will have to be used within one year of receiving the refund.
- Can I claim the ERC if I have too much income?
Yes. You may not need to claim the ERC if your adjusted gross income exceeds $200,000 for married individuals or $125,000 for individuals. However, you may not receive a refund if your ERC is $7,500 or less.
- How much do I need to have in my bank account to claim the ERC?
You can claim up to $7,500. You can receive the ERC using a check, direct deposit, or through the IRS2Go mobile app. If you are not able to receive the ERC because you do not have enough money in your bank account, you should apply for an installment agreement. The installment agreement would require a small fixed fee and is temporary, renewable for up to three years. It will have a smaller tax impact than claiming the ERC and can be taken as a refund at any time during the agreement period.
- Will it be easy to claim the ERC on my taxes if I am self-employed?
Yes. The ERC can be claimed on tax returns for self-employment income. However, there are some fees and documentation requirements. You must be able to track your W-2 information and compare it to your tax withholding form and hours worked to determine your amount of income tax credit. If you are self-employed and meet the requirements, you can claim the ERC on your taxes.
I have a hunch that most people want to know if they will be eligible for a payroll tax credit for the ERC. However, many taxpayers may not know they qualify. The ERC is a valuable tax break that can be claimed for the EIC. For more information on EIC and other refundable credits, see our About Taxes page.
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I hope this helps you!