The federal government has designed a tax credit for employers who offer retention bonuses to their employees. The employee retention tax credit is designed to encourage companies to keep good employees on board, rather than losing them to other companies or retirement.
The employee retention tax credit is calculated at 20 percent of the bonus paid to an eligible employee. For example, if your company offers a $1,000 bonus as an employee retention incentive and an eligible employee receives it, then you’ll receive a $200 tax credit on your corporate taxes.
To qualify for this credit, your business must pay the bonus to employees who have worked for you for at least one year and have been employed by your company for at least one of those years. Also, the bonuses must be paid under a written plan that has been communicated to all eligible employees and that does not discriminate in favor of highly compensated employees (non-owner managers).
You can claim this credit on your corporate tax return. The credit is not refundable and cannot be carried back to a previous year’s tax return or forward to a future year’s tax return.
Who Is Eligible for ERC?
To qualify for ERC, your business must have been in existence for at least three years prior to the tax year in which the credit is claimed. Your company also must have:
Employed at least one full-time employee during the 12-month period ending on the last day of your tax year.
Paid at least $50,000 in wages to eligible employees during that same 12-month period.
Had no more than 25% of its gross receipts from sales of goods or services provided to any single customer who accounted for more than 10% of your total annual revenues.
There is no limit on the amount of ERC that can be claimed. The credit may be applied to both your federal and state tax returns.
The ERC program was created to help small businesses take advantage of the first-year write offs available with the new tax law. It has proven to be a successful tool in increasing employment and stimulating growth in local economies.