The Ins and Outs of the Employee Retention Credit
The Employee Retention Credit is a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit provides an incentive for businesses to keep employees on their payroll.
The Employee Retention Credit is a refundable tax credit against certain employment taxes. It is equal to 50 percent of up to $10,000 in wages paid between March 12, 2020, and Jan. 1, 2021. Employers can generally include certain health plan costs, as well as federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit.
This credit can be taken without penalty and can include any reduction for employment tax deposits in anticipation of the paid sick and family leave credit under the Families First Coronavirus Response Act (FFCRA).
As explained by the IRS, employers (including tax-exempt organizations) are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
- A significant decline in gross receipts.
According to the IRS, a significant decline in gross receipts begins on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The IRS says that a significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80 percent of its gross receipts for the same calendar quarter in 2019.
For each employee, wages up to $10,000 can be counted to determine the amount of the 50-percent credit. This credit can apply to wages already paid after March 12, 2020.
The amount of qualified wages depends on the number of employees. For employers with 100 or fewer employees (on average in 2019), the credit is based on wages paid to all employees whether they worked or not. Employers can take the credit for employees who were paid for full-time work.
For employers with more than 100 employees (on average in 2019), the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Only wages up to the amount that the employee would have otherwise been paid during the 30 days prior to the pandemic-related hardship can be included.
As explained by the IRS, an eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- Employers that received a Small Business Interruption Loan under the Paycheck Protection Program (PPP) are not eligible for the Employee Retention Credit.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA.
- Wages counted for this credit cannot be counted for the credit for paid family and medical leave under Section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code for the employee.
Claiming the Credit
Employers can use this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due to COVID-19.
Beginning with the second quarter of 2020, eligible employers can report their qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (Form 941). The Employee Retention Credit is taken against the employer’s share of social security tax, but the excess is usually refundable.
FAQs on the Employee Retention Credit are available on the IRS website at irs.gov/coronavirus/employee-retention-credit.
This article appeared in the January/February 2021 issue of New Jersey CPA magazine. Read the full issue.