The Employee Retention Credit has not received as much attention as the Paycheck Protection Program and the Economic Impact Payment parts of the CARES Act, but this credit can provide certain businesses affected by the pandemic with some much-needed relief.
Before we describe the credit and how it works, note that small businesses that have taken out a loan under the Paycheck Protection Program are NOT eligible for the Employee Retention Credit.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable credit of up to $5,000 for each employee on payroll expenditures incurred between March 12 and December 31, 2020. This credit is first used toward federal payroll taxes for that employee. Any excess can then be received as a cash refund.
How Do You Qualify for the Employee Retention Credit?
This credit is available to all types of businesses except state and local governmental agencies.
Businesses can qualify in two ways:
- The business is fully or partially suspended by government order due to COVID-19 during a calendar quarter.
- Gross receipts have fallen below 50% of the comparable quarter in 2019. When the gross receipts for that business increase to 80% of the comparable quarter in 2019, the business no longer qualifies for that quarter.
These measures are tested each calendar quarter for 2020.
How Do You Calculate the Employee Retention Credit?
The credit is 50% of qualifying wages paid between March 12 and December 31, 2020. The maximum wage base is $10,0000 per employee, which means that the total allowable credit is $5,000 per employee.
For example, during the second quarter of 2020, an employee is paid $8,000 after March 12. The maximum credit for that employee for this quarter is 50% of $8,000, or $4,000. During the third quarter of 2020, that same employee is paid $9,000. While 50% of $9,000 is $4,500, because $4,000 was claimed for quarter two, only $1,000 can be claimed for that employee for quarter three.
Employers who had fewer than 100 employees during 2019 can count wages paid to all employees during a quarter. Employers who had more than 100 employees during 2019 are only allowed to include employees who were paid but who did not work during a calendar quarter.
How Do You Claim the Employee Retention Credit?
Employers can reduce the amount of payroll taxes they deposit by the amount of the credit. Eligible payroll taxes include federal withholding and both employee and employer portions of
Social Security and Medicare taxes. There will be no penalty for failing to deposit payroll taxes on a timely basis.
If the amount of the credit is greater than the amount of payroll taxes that will be deposited, employers can request an advance of the credit using Form 7200, Advance Payment of Employer Credits due to COVID-19. This form can be filed multiple times during a given quarter.
The IRS has a thorough set of FAQs about the Employee Retention Credit, which provides details about calculating this credit, and explain what healthcare benefits can be included. The IRS continues to update those FAQs as new questions arise. We will keep you posted as more information becomes available.