The CARES Act (Coronavirus Aid, Relief and Economic Security) that was signed into law on March 27, 2020 introduced the employee retention credit designed to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
The employee retention credit applies to qualified wages (including certain health plan expenses) paid beginning with the second quarter of 2020, and for any calendar quarter in which operations were suspended due to COVID-19.
The Employee Retention Credit is taken against an employer's qualifying payroll tax payments. The credit is calculated for each calendar quarter after March 12, 2020, and before Jan. 1, 2021. Qualified wages are based on the average number of employees in 2019.
Who is considered an eligible employer?
An eligible employer is an employer that carries on a trade or business during calendar year 2020, including a tax-exempt organization, and either of the following:
- The business was fully or partially suspended by a government order due to COVID-19.
- Gross receipts are below 50 percent of the comparable quarter in 2019 (eligibility ends when gross receipts are more than 80 percent of the comparable quarter in 2019).
What are qualified wages?
The amount of qualified wages depends on the number of employees an eligible employer had in 2019.
Eligible employers with more than 100 full-time employees: Qualified wages include up to $10,000 per employee in wages and certain healthcare costs paid to employees who are not providing services due to suspended operations or to a decline in gross receipts.. Qualified wages only include wages up to the amount the employee would have received for working during the 30 day period immediately preceding the employer becoming eligible.
Eligible employers with 100 or fewer full-time employees: Qualified wages include up to $10,000 per employee in wages paid to any employee during suspended operation periods or the period of the decline in gross receipts, regardless of whether or not the employees are providing services.
How do employers claim the credit?
Beginning with the second quarter of 2020, the employee retention credit can be claimed by eligible employers by reporting 50% of qualified wages paid between March 13, 2020 and March 31, 2020 plus 50% of qualifying wages paid during the second quarter of 2020 on their second quarter 941. The employer will continue to report 50% of qualified wages paid for each quarter of 2020 on Form 941.
If an eligible employer anticipates claiming the credit in any quarter during 2020, they can retain the corresponding amount of employment taxes that they otherwise would have paid, including 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.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200 available at the IRS website.
Employers who received a Paycheck Protection Program (PPP) loan are not eligible to claim the employee retention credit.
Employers claiming the employee retention credit also must exclude any wages for which they claimed a tax credit for:
- Paid sick and family leave under the Families First Coronavirus Response Act (FFCRA),
- The Employer Credit for Paid Family and Medical Leave
- The Work Opportunity Credit.