Were you able to receive relief from the small business loans offered through the CARES Act? If the answer is no, you may be able to claim an Employee Retention Tax Credit!
The CARES Act supports certain employers that operate a business during 2020 and retain their employees with an employee retention tax credit, despite experiencing economic hardship related to COVID-19. The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.
Who is eligible for the Employee Retention Tax Credit?
All employers are eligible for the employee retention credit, including tax-exempt organizations. There is no size limitation or threshold. However, state and local governments and their instrumentalities and small businesses that take small business loans are not eligible.
Qualifying employers must be either:
- an employer whose business is fully or partially suspended by a government order related to COVID-19 during the calendar quarter; or
- an employer whose gross receipts are below 50% of the comparable quarter in 2019. However, when the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.
How do you calculate qualified employee retention wages for the Employee Retention Tax Credit?
This credit is calculated quarterly. It is 50% of qualifying wages paid, up to $10,000 per employee in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages are not limited to cash payments, but also include a portion of the cost of employer provided health care.
What are qualifying wages for the Employee Retention Tax Credit?
Qualifying wages are based on the average number of a business’ employees in 2019.
- For employers with 100 or fewer employees, the credit is based on wages, including health care costs, paid to all employees, regardless if they worked or not during the period operation were suspended or a period of decline in gross receipts. If the employees worked full-time and were paid for full-time work, the employer still receives the credit.
- For employers with more than 100 employees, the credit is allowed only for wages, including health care costs, paid to employees who did not work during the calendar quarter. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
What are the limitations for the Employee Retention Credit?
- Qualified wages, including health care costs, are capped at $10,000 per employee regardless of the number of employees.
- Qualifying wages cannot include wages that the employer received a credit for paid sick leave or paid family leave under the Families First Coronavirus Response Act (FFCRA). Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit (WOTC)for the employee.
- Wages counted for the employee retention may not be counted toward the tax credit for providing paid family and medical leave.
Waiver of Penalties
IRS can waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit [CARES Act, Sec. 2301(k)].
Where do you report the Employee Retention Credit?
There is no reporting of employer retention credit on first quarter Form 941. The IRS updated the 2020 Form 941 and its instructions. The form and the instructions themselves have no substantive changes; however, the IRS added a page preceding the form and instructions that addresses the employee retention tax credit established under the CARES Act due to the current coronavirus (COVID-19) public health emergency.
The preceding page accompanying the Form 941 and its instructions state that employers should not report a credit for 50% of qualified wages paid from March 13, 2020 through March 31, 2020 on the first quarter Form 941, 941-SS, or 941-PR. The IRS instructs that qualified wages paid from March 13, 2020 through March 31, 2020 must be reported on the second quarter Form 941 along with qualified wages paid from April 1, 2020 through June 30, 2020 for the employee retention tax credit.
Please remember that it will be important to check back often for updates and changes to the application process.