Employee Retention Credit

The Employee Retention Credit is a federal tax credit available to employers that retain employees for at least 52 weeks in any calendar year. The credit may reduce an employer’s tax liability by up to $2,000 per employee. The credit is calculated as a percentage of an employee’s wages and is generally valid for the first four years of employment with the employer.

To qualify for the credit, an employer must meet certain conditions including maintaining a payroll record that identifies each employee who was retained and detailing the reason(s) why each employee was retained. To claim the credit, an employer must file Form 941, Employer’s Quarterly Federal Tax Return, and attach Schedule Q to the return. For more information, visit the IRS website or consult with a qualified tax advisor.

Who is Eligible for the Credit?

The Employee Retention Credit allows businesses to reduce the amount of federal income tax they owe on certain employee compensation expenses. You must meet all three of the following conditions to qualify for the credit:

You must have paid qualifying employee compensation expenses in the current or previous year.

Your qualifying employee compensation expenses must exceed 2 percent of your taxable income from employee compensation for the current or previous year.

Your company must have had at least one qualifying full-time employee during the preceding year.

How to Claim Your Refund

If you were an employee who left your job in the past year and you are entitled to receive a refund for unused vacation time, you may want to file a claim for the Employee Retention Credit. The credit helps employers retain qualified employees. To qualify, you must have been employed for at least 330 days during the 12-month period ending on the day you quit or were fired, and your employer must have paid or offered to pay you at least $2,000 in total wages during that period.

To determine if you are eligible, first check your W-4 form to see if your employer reported any wages on it. If they did not report any wages on your W-4 form, then contact your former employer to find out what wages they actually paid you. If after checking with your former employer and contacting IRS wage verification services you still cannot determine whether or not you qualify for the credit, then review IRS Publication 926, Employer’s Tax Guide: Retirement Plans – Employer Contributions Contribution Limits and Earnings Restrictions. This publication has information about which type of retirement plan is available to which employee and how much each employee can contribute. You may also want to consult with an accountant or tax preparer about whether or not you are eligible for the credit.

Conclusion

If you are an employer and qualify for the employee retention credit, it is important to determine your eligibility and make sure that you claim your refund. The employee retention credit allows businesses with at least 50 employees who had their employment terminated in 2018 to claim a refund of up to $2,000 per employee. In order not to miss out on this valuable tax break, employers should review their termination records and ensure that they meet all the eligibility requirements.