On March 31, 2020, the IRS launched the Employee Retention Credit. This new tax credit is designed to encourage businesses to keep employees on their payroll. Let’s discuss the Employee Retention Credit in more detail.
Employee Retention Credit: Eligibility Criteria
Two categories of employers are not eligible to apply for the Employee Retention Credit: (a) state and local governments and their instrumentalities; and (b) small businesses who take certain small business loans.
The rest of the employers (including tax-exempt organizations) regardless of size can apply as long as they fall within one of the following two categories.
The first category includes all businesses which were fully or partially suspended by government order due to COVID-19 during the calendar quarter. It appears that this category applies to the state “shelter-in-place” orders.
The second category includes businesses with gross receipts 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.
Employee Retention Credit: Credit Calculation
The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. The definition of wages includes not only cash payments, but also a portion of the cost of employer-provided health care insurance.
Employee Retention Credit: Qualified Wages
Qualifying wages are based on the average number of employees in 2019. There is an important difference, however, in the calculation of qualified wages based on the size of an employer.
With respect to employers with less than 100 employees: the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
With respect to employers with more than 100 employees: if the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Employee Retention Credit: Application Process
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 of 2020. 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. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Sherayzen Law Office will continue to follow closely the tax developments concerning the COVID-19 tax relief.