What advisers need to know about the new employee retention credit

As the new year barrels ahead, changes are coming, along with a new stimulus package. The newest bill settles in at more than 5,000 pages, so advisers can forgive themselves if they don’t feel like they know everything it covers. 

In this column, I will help to demystify one critical element included in the new stimulus package; The Employee Retention Credit, in order for advisers to better inform their clients as well as make better decisions for their own businesses.

Below are the key considerations you need to know regarding changes to the employee retention credit:

What’s new with the employee retention credit

The first stimulus package disqualified employers who received a Paycheck Protection Program loan from also taking the employee retention credit. 

The new bill reverses that so employers can take advantage of both.  

For those unfamiliar, the credit allows employers to claim a credit for certain wages paid in 2020, up to a maximum of $5,000 per employee (50% of first $10,000 of wages).

Employee retention credit eligibility

The employee retention credit is only applicable for businesses who met one of two criteria:

• Businesses who had operations fully or partially suspended by government order in at least one quarter of the calendar year 2020.

In these situations, while most advisory firms themselves likely don’t qualify, many of their business owner clients will qualify. So advisers should make sure to discuss this with any of their clients who are business owners.

• The other possible eligibility criteria looks at gross receipts. Gross receipts must be down at least 50% during one quarter in 2020 when compared to the same quarter in 2019.

Again, given the quick stock market rebound that occurred after the initial COVID-19 shutdowns, most advisory firms themselves may not qualify for this credit. However, this is another area in which advisers need to bring this up to their clients who are business owners.

Tremendous opportunity for advisers

From the financial adviser’s perspective, these changes are a “tremendous planning opportunity,” according to Andrew Altfest, founder of FP Alpha. 

“Changing eligibility requirements creates a confusing time for business owners, so advisors who engage in proactive conversations can add tremendous value,” Altfest said. “Identifying clients who are unaware that they qualify for these credits is a way to put pure dollars back into their pockets and build immediate, long-lasting trust.”   

In fact, new technology, including FP Alpha, allows advisers to scale this type of service they are able to provide to their clients. It is a win/win for all parties.

Final key takeaways on stimulus bill changes

Updated legislation does more than adjust tax year 2020 eligibility requirements, it also extends and improves benefits halfway into 2021. Qualifying wages paid through June 30 of this year are eligible for the credit. 

The updated bill also raises the amount of credit an employer can take from 50% of wages paid to 70% of wages paid, meaning that a business can claim a max credit of $7,000 on the first $10,000 of wages per employee. Also, the $7,000 limit per employee is per quarter, thus an employer can get a $7,000 credit in the first quarter and another $7,000 credit in the second quarter. The gross receipts threshold was also dropped from 50% to only 20% for 2021 making it easier to qualify for the credit. The updated stimulus bill includes many additional changes. If you are a financial advisor who wants to prepare your clients to the fullest extent, talking to a tax advisor or implementing tax-aware financial planning software are the best action steps you can take right now to help clients through these confusing times.