The employee retention credit is a refundable credit of 50% of up to $10,000 in qualified wages (qualified health plan expenses included), or a maximum of $5,000 per employee. This credit is available against wages paid from March 12, 2020 through December 31, 2020. There are 2 ways to qualify:
- The business was partially or fully suspended due to government orders during the calendar quarter due to COVID-19, or
- The business had a significant decline in gross receipts compared to the same quarter as last year.
Significant is defined as less than 50% of the comparable quarter from 2019.
The business continues to qualify until the start of the quarter after gross receipts go above 80% to the comparable quarter from 2019.
This is available to all employers, regardless of size, including tax-exempt organizations. Exceptions are:
- Small businesses that take small business loans (for example, PPP). If they received a PPP loan but repay it by May 14, 2020, they can retain their eligibility for this credit
- State and local governments and the instrumentalities
- Self-employed individuals for their self-employment earnings
Qualified wages are defined differently for business with less than 100 employees compared to businesses with more than 100 employees.
For employers with less than 100 employees on average for 2019, they can count all wages paid to employees, regardless of whether they worked or not. If the employee worked full-time and was paid full-time, they still qualify.
For employers with more than 100 employees on average for 2019, the credit is only allowed for wages paid to employees that did not work during the calendar quarter.
Employers can reduce their payroll tax deposits for the credits. If they don’t have sufficient payroll taxes, they can request an advance of the credit by completing Form 7200 Advance Payment of Employers Credits due to COVID-19. Credits are reconciled on the quarterly 941 employment tax return.
Employers that operate an essential business are not considered to have full or partial suspension of operations. An exception would be if the business is unable to receive shipments of critical goods or materials due to a government order that caused the supplier to suspend its operation.
If an employer is subject to a government order to fully or partially suspend business operations, it only qualifies for the retention credit for the quarters it was under the orders. As long as 1 month of the quarter is affected, they qualify for the full quarter.
Employers can qualify for the Employee Retention Credit and the FFCRA sick leave credit, but not for the same wages. Similar with WOTC credits, employers cannot claim the Employee Retention Credit and the WOTC for the same employee for the same period of time.
Qualified health plan expenses include the employer paid and employee pre-tax deductions. It does not include employee after tax contributions. If you have questions regarding this employee retention credit, please contact Barb Sawdy, CPA, at email@example.com