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Accounting and Tax Planning Special Coverage

This Tax-relief Provision of the CARES Act Brings Advantages to Employers

By Carolyn Bourgoin, CPA

Businesses that either repaid in a timely fashion or did not receive a loan pursuant to the Paycheck Protection Program (PPP) should explore their eligibility for the new Employee Retention Credit, one of the tax-relief provisions of the CARES Act passed on March 27.

Like the PPP loan program, the Employee Retention Credit (ERC) is aimed at encouraging eligible employers to continue to pay employees during these difficult times. Qualifying businesses are allowed a refundable tax credit against employment taxes equal to 50% of qualified wages (not to exceed $10,000 in wages per employee).

Let’s take a look at who is eligible and how to determine the credit.

Who Is an Eligible Employer?

All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC. This is the case as long as the employer did not receive, or repaid by the safe-harbor deadline, a PPP loan. The IRS has clarified that self-employed individuals are not eligible to claim the ERC against their own self-employment taxes, nor are household employers able to claim the credit with respect to their household employees.

Carolyn Bourgoin

Carolyn Bourgoin

First Step: Determine Eligible Quarters to Claim the Credit

Eligible businesses can claim a credit equal to 50% of qualified wages paid between March 12 and Dec. 31, 2020 for any calendar quarter of 2020 where:

• An eligible employer’s business was either fully or partially suspended due to orders from the federal government, or a state government having jurisdiction over the employer limiting commerce, travel, or group meetings due to COVID-19; or

• There is a significant decline in gross receipts. Such a decline occurs when an employer’s gross receipts fall below 50% of what they were for the same calendar quarter in 2019. An employer with gross receipts meeting the 50% drop will continue to qualify thereafter until its gross receipts exceed 80% of its gross receipts for the same quarter in 2019. Exceeding the 80% makes the employer ineligible for the credit for the following calendar quarter.

This is an either/or test, so if a business fails to meet one criteria, it can look to the other in order to qualify. An essential business that chooses to either partially or fully suspend its operations will not qualify for the ERC under the first test, as the government did not mandate the shutdown. It can, however, check to see if it meets the significant decline in gross receipts for any calendar quarter of 2020 that would allow it to potentially claim the ERC.

The gross-receipts test does not require that a business establish a cause for the drop in gross receipts, just that the percentage drop be met.

Second Step: How Many Employees?

Determining the wages that qualify for the ERC depends in part on whether an employer’s average number of full-time-equivalent employees (FTEs) exceeded 100 in 2019. An eligible employer with more than 100 FTEs in 2019 may only count the wages it paid to employees between March 12, 2020 and prior to Jan. 1, 2021 for the time an employee did not provide services during a calendar quarter due to the employer’s operations being shut down by government order or due to a significant decline in the employer’s gross receipts (as defined previously).

“All private-sector employers, regardless of size, that carry on a trade or business during calendar year 2020, including tax-exempt organizations, are eligible employers for purposes of claiming the ERC.”

In addition, an employer of more than 100 FTEs may not count as qualifying wages any increase in the amount of wages it may have opted to pay employees during the time that the employees are not providing services (there is a 30-day lookback period prior to commencement of the business suspension or significant decline in gross receipts to make this determination).

In contrast, qualified wages of an employer that averaged 100 or fewer FTEs in 2019 include wages paid to any employee during any period in the calendar quarter where the employer meets one of the tests in step one. So even wages paid to employees who worked during the economic downturn may qualify for the credit.

Due to the potential difference in qualifying wages, it is important to properly calculate an employer’s ‘full-time’ employees for 2019. For purposes of the ERC, an employee is considered a full-time employee equivalent if he or she worked an average of at least 30 hours per week for any calendar month or 130 hours of service for the month. Businesses that were in operation for all of 2019 then take the sum of the number of FTEs for each month and divide by 12 to determine the number of full-time employee equivalents. Guidance has been issued by the IRS on this calculation for new businesses as well as those that were only in business for a portion of 2019.

Third Step: Calculate the Credit Based on Qualifying Wages

As mentioned earlier, the Employee Retention Credit is equal to 50% of qualifying wages paid after March 12, 2020 and before Jan. 1, 2021, not to exceed $10,000 in total per employee for all calendar quarters. The maximum credit for any one employee is therefore $5,000.

Wages that qualify toward the $10,000-per-employee cap can include a reasonable allocation of qualified healthcare costs. This includes an allocation of the employer portion of health-plan costs as well as the cost paid by an employee with pre-tax salary-reduction contributions. Employer contributions to health savings accounts or Archer Medical Savings Accounts are not considered qualified health-plan expenses for purposes of the ERC.

Qualifying wages do not include:

• Wages paid for qualified family leave or sick leave under the Family First Coronavirus Relief Act due to the potential payroll tax credit;

• Severance payments to terminated employees;

• Accrued sick time, vacation time, or other personal-leave wages paid in 2020 by an employer with more than 100 FTEs;

• Amounts paid to an employee that are exempt from Social Security and Medicare taxes (for example, wages paid to statutory non-employees such as licensed real-estate agents); or

• Wages paid to an employee who is related to the employer (definition of ‘related’ varies depending on whether the employer is a corporation, a non-corporate entity, or an estate or trust).

Eligible employers who averaged more than 100 FTEs in 2019 will then be potentially further limited to the qualifying wages paid to employees who were not providing services during an eligible calendar quarter.

How to Claim the ERC

An eligible business can claim the Employee Retention Credit by reducing its federal employment-tax deposit (without penalty) in any qualifying calendar quarter by the amount of its anticipated employee retention credit. By not having to remit the federal employment-tax deposits, an eligible business has the ability to use these funds to pay wages or other expenses. In its FAQs, the IRS clarified that an employer should factor in the deferral of its share of Social Security tax under the CARES Act prior to determining the amount of employment-tax deposits that it may retain in anticipation of the ERC. The retained employment taxes are accounted for when the Form 941, Employer’s Quarterly Federal Tax Return, is later filed for the quarter.

If the ERC for a particular quarter exceeds the payroll-tax deposits for that period, a business can either wait to file Form 941 to claim the refund, or it can file the new Form 7200, Advance Payment of Employer Credits Due to COVID-19, prior to filing Form 941 to receive a quicker refund.

If an employer later determines in 2021 that they had a significant decline in receipts that occurred in a calendar quarter of 2020 where they would have been eligible for the ERC, the employer can claim the credit by filing a Form 941-X in 2021.

Additional Rules

For purposes of determining eligibility for the credit as well as calculating the credit, certain employers must be aggregated and treated as a single employer.

Also, as a result of claiming the Employee Retention Credit, a qualifying business must reduce its wage/health-insurance deduction on its federal income-tax return by the amount of the credit.

In summary, the Employee Retention Credit is one of several tax-relief options provided by the CARES Act. As it is a refundable credit against federal employment taxes, it is advantageous to all employers, even those who will not have taxable income in 2020. Employers who did not receive PPP funding should check to see if they meet the eligibility requirements and take advantage of this opportunity.

Please note that, at the time this article was written, Congress was considering additional relief provisions that may or may not have impact on the information provided here. u

Carolyn Bourgoin, CPA is a senior manager at Holyoke-based accounting firm Meyers Brothers Kalicka, P.C.; [email protected]

Insurance

Protect and Serve

Phillips Insurance team members, from left, Christopher McMaster,  Chrystal Greenleaf, Joe Phillips, and Christopher Rivers.

Phillips Insurance team members, from left, Christopher McMaster, Chrystal Greenleaf, Joe Phillips, and Christopher Rivers.

In the 66 years since Joe Phillips’ father opened the business that bears the family’s name, the insurance industry has undergone plenty of change, both in the range of risks faced by individual and business clients and in the products available to lower those risks and protect key assets. But the way the agency does business has changed as well, reflecting a modern approach to technology, mobility, and employee flexibility. The result has been high retention of both team members and clients — and consistent growth.

The insurance world has changed significantly in the 22 years since Joseph Phillips took the reins at Phillips Insurance Inc. — not to mention the 66 years since his father hung out a shingle in Chicopee.

But some changes at his agency don’t have as much to with insurance itself as they do with the way today’s employees — especially younger ones — want to work.

“We try to be as flexible as possible in this changing work environment,” Phillips said, noting that four employees work from home — actually, they kind of have to, living in Montana, Florida, Delaware, and right around the corner, relatively speaking, in Boston. “And we try to be as flexible as possible. Our office is open from 6 to 5 every day, so everybody picks eight hours within that timeframe to work. Some people come in at 6 and leave at 2. It works out, especially for some of the new parents whose spouses work.”

It adds up to a high employee-retention rate; four of Phillips’ 28 staffers have been there for more than 20 years, and 10 have been around more than a decade.

“You need to think about employee retention,” he said. “The average person has seven to nine jobs in their lifetime. If our average employee had seven to nine jobs in their lifetime, our retention would kill us. And our customers want to come in and see the same face, talk to the same person on the phone.”

“Everyone has become so fast-paced right now — people want something sent over, and you’re e-mailing and texting clients 24/7. And you have to, because it’s just as fast on their side as well.”

That’s why insurance agencies, like businesses of all kinds, need to compete for talent, he said — not just up front, but once they’re on board.

“Interviews used to be pretty one-way, and now — and I think it’s healthy — it’s a two-way interview, so when I bring in a new prospect for employment, they’re interviewing me as well. We sell them on the benefits we’re providing — retirement plan, health insurance, flexible work hours.”

It’s an office that’s set up for flexibility, he said — not just for flex time and maternity leave, but when a snowstorm strikes, or a major accident clogs up the Mass Pike, workers are set up through agency-automation technology to work from anywhere. That means no slowdowns at a time when clients demand speed and efficiency like never before.

“Everyone has become so fast-paced right now — people want something sent over, and you’re e-mailing and texting clients 24/7. And you have to, because it’s just as fast on their side as well,” Phillips said. “There are no more days off, which is good and bad, I guess. Companies don’t start their workday at 9 o’clock anymore. If they are, they’re far behind the curve.”

The agency’s headquarters in downtown Chicopee will soon expand for the fourth time in the past 20 years, a testament to its consistent growth.

The agency’s headquarters in downtown Chicopee will soon expand for the fourth time in the past 20 years, a testament to its consistent growth.

All this modernization and flexibility makes a difference, Phillips said, noting that clients appreciate stability — the agency boasts a 98% client-retention rate — and the staff has increased from 17 employees in 2014 to 28 today. Some of that growth has been internal, with three people who started as receptionists moving up to broader duties.

In short, Phillips Insurance is keeping up with the times, its president said, and growing all the more for it.

Family Business

Phillips’ father entered the insurance business in 1953, purchasing the William J. Fuller Agency, which was founded in 1892, and changing the name. The younger Phillips came on board in 1996 and took over the business when his father died unexpectedly a year later. At the time, the staff totaled three people, and two of them — Joe Phillips and Jeanne Jones — are still there.

Growth has necessitated some physical changes. This fall, the agency will undergo a 2,500-square-foot addition on the back of the building — its fourth addition in 20 years — and it also bought the former Masonic temple next door and will be tearing it down to build a 30-car parking garage.

The growing clientele is dominated by commercial lines, which account for 80% of total premiums. Much of that business is surety bonds for construction-related risk, mostly in Western Mass., but a good percentage east of Worcester, where the construction market is particularly active, and some out of state.

“MGM has really helped — we had 10 clients working down there, from a $20 million site package to the $6 million masonry package,” Phillips explained, adding that the Five Colleges have been doing a lot of building in recent years as well, providing further growth opportunities.

Another change has been the rise of captive insurance, he said. “That’s a little different. Our clients actually get together with a group of other like-industry-group businesses, and they form their own insurance company. They become the profit center. Instead of spending $500,000 a year to a major national carrier and that carrier making hundreds of thousands of dollars off you, you can make money off yourself. It’s becoming more and more common; it’s a growing section of the market.”

Phillips has also grown its employee-benefits department quite a bit over the past five years, while its personal lines — including home, auto, boat, ATV, and personal umbrella — are growing well, with the agency licensed with 20 insurance carriers, including some of the largest players, like Safeco (a member of Liberty Mutual), Arbella, Safety, and Preferred Mutual.

Still, “we specialize in complex risk — a lot of construction solar, recycling … a lot of tougher industries,” Phillips stressed. “It’s a diverse group of businesses, from Northern Tree Service, one of the largest tree-cutting companies in the country, to the Student Prince restaurant in Springfield.

“We’re an industry-specialization agency — construction, hospitality, manufacturing — so we align ourselves with the insurance carriers that want to ensure those types of businesses,” he added. “We have very good relationships with our insurance carriers. We’re one of the largest writers for Liberty Mutual in New England, and other household names have been great partners.”

Current Events

The modern approach to doing business spills over into Phillips’ online presence, which includes Instagram, LinkedIn, and a revamped website with an active blog that aims to educate clients — and hopefully future clients — on various aspects of insurance and risk; recent articles cover boating safety, lowering one’s carbon footprint, and home-security technology. Meanwhile, the agency has won awards from the Republican’s Reader Raves program four years running.

Meanwhile, the agency’s charitable efforts include sending about 15 employees annually to prepare Thanksgiving meals at the Knights of Columbus, as well as donating to efforts like the Joseph D. Freedman Bowl-a-thon to benefit Camphill Village, Berkshire Hills Music Academy in South Hadley, and Link to Libraries.

The latter is an example of civic involvement that goes beyond donations, Phillips said. “We’ve got about six people now going to elementary schools in Chicopee. We donate a few hundred books a year, and a different person goes over and reads every month. It’s great for morale. Everybody loves to do it. And it’s an opportunity to get out of the office.

In fact, he said, there’s a bit of a reading backlog because the volunteer readers don’t want to stop doing it. “We gently nudge them aside to give everyone an opportunity.”

Another hands-on activity is the bowl-a-thon, which Phillips has been involved in for eight years, sending 15 to 20 bowlers to participate and raising $85,000 last year alone.

“We want people to feel good about where they work and what we do for the community, and there are certainly plenty of worthwhile causes out there,” Phillips said. “It’s tough to pick — there are only so many hours in the day and so much money to go around. You have to pick a few and really make a commitment to it. Something like Link to Libraries is really hands-on and gets everyone involved, rather than just writing a check.”

In a way, those community-engagement efforts aren’t much different than the insurance business itself. In both cases, the goal is to solve problems and make people’s lives a little more secure.

Joe Phillips says the agency has built a strong reputation for taking on complex risk, much of it surety bonds for construction projects.

Joe Phillips says the agency has built a strong reputation for taking on complex risk, much of it surety bonds for construction projects.

“With the personal lines, we’re protecting someone’s most valuable assets,” he said, adding that they also help families deal with the cost and stress of milestones like, say, adding youthful operators to an auto policy.

“On the commercial side, we’re also solving problems,” he went on. “We’re coming in and working as a trusted advisor, much like they’d work with their CPA or their attorney. We identify risk exposures that maybe they hadn’t really reflected on in the past that they should have — assets that are at risk. We try to work with them to develop the most comprehensive package for their insurance, whether it’s a utilizing captive insurance or using higher deductibles to save on premiums and maybe absorb some of the risk on smaller losses.”

It’s gratifying, Phillips added, to come to work every day knowing this work — and what the agency does outside the office — makes a difference in the region.

“We try to be out there in the community through business networking, charitable networking, and, of course, just trying to do the best job for our clients,” he said. “That’s the best referral — our existing clients.”

Joseph Bednar can be reached at [email protected]

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