The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees.
The employee retention credit is designed to encourage businesses to keep employees on their payroll. The amount of the credit is 50% of qualified wages paid up to an annual limit of $10,000, which equals a maximum credit amount of $5,000 for each employee for the year.
This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
Eligible employers are employers who operate a trade or business and has experienced one of these:
- Fully or partially suspended operations because of a government order due to COVID-19
- A significant decline in gross receipts in a calendar quarter when compared to 2019
How is the credit figured?
- The amount of the credit is half of qualifying wage's paid up to $10,000 for all calendar quarters. The maximum credit for any employee is $5,000 for the year.
- Wages paid between March 12, 2020, and January 1, 2021 are eligible.
- Wages are not limited to cash payments. They also include a portion of employer-provided health care costs.
Which wages qualify?
Qualified wages are based on the business’s average number of full-time employees in 2019.
- Employers with less than 100 employees. Small employers, those that had 100 or fewer employees, may receive the credit for wages paid to employees whether or not they are providing services to the employer.
- Employers with more than 100 employees. Large employers, those that had more than 100 employees, may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
IMPORTANT: The Employee Retention Credit applies to full-time workers only.
How do eligible employers get the credit?
Employers must report their qualified wages on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return.
They can reduce their required deposits of payroll taxes withheld from employees’ wages by the amount of the credit.
Request Advanced Payment. They can also request an advance of the employee retention credit by submitting Form 7200. Eligible employers may use the employee retention credit with other relief such as, payroll tax deferral which may affect deposits and advances. (Learn more about Form 7200 here.)
Can an employer receive the Employee Retention Credit and PPP?
Both the Employee Retention Credit and Paycheck Protection Program (PPP) provide financial relief to businesses that retain employees. You cannot take advantage of both. You have to choose one or the other.
Is a government employer or self-employed person eligible?
No. Government employers are not eligible for the employee retention credit. Self-employed individuals also are not eligible for the credit for self-employment services or earnings.
The IRS offers tax help here for taxpayers, businesses, tax-exempt organizations and others – including health plans – affected by coronavirus (COVID-19).
As you know, the tax filing deadline is June 15th this year. It is going to be more complex than ever and tax planning even more important.
If you need help, please take a moment to contact us!
