The Treasury Department and the Internal Revenue Service have launched the Employee Retention Credit, designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19, for a maximum credit of $5,000 per employee.
Does my business qualify to receive the Employee Retention Credit?
The credit is available to all employers regardless of size, including tax-exempt organizations. There are only a few exceptions: State and local governments and their instrumentalities, self-employed individuals and small businesses receiving Small Business Interruption Loans under the Paycheck Protection Program (PPP).
Qualifying employers must fall into one of two categories:
- The employer's business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
- The employer's gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
These measures are calculated each calendar quarter.
How is the credit calculated?
The amount of the credit is 50% of qualifying wages (including health plan expenses) paid up to $10,000 in total, so that the maximum credit for qualified wages paid to any employee is $5,000. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit.
How do I know which wages qualify?
Qualifying wages are based on the average number of a business's employees in 2019.
Employers with less than 100 employees: For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. If the employees worked full time and were paid for full time work, the employer still receives the credit.
Employers with more than 100 employees: For employers who had more than 100 employees on average in 2019, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Are any wages not eligible?
Wages do not include amounts taken into account for purposes of the payroll credits, for required paid sick leave or required paid family leave in the Families First Coronavirus, nor for wages taken into account for the employer credit for paid family and medical leave. No credit is available with respect to an employee for any period for which the employer is allowed a Work Opportunity Credit with respect to the employee.
I am an eligible employer. How do I receive my credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.