Is The Employee Retention Credit For You?

What You Need to Know

If you are eligible for the Employee Retention Credit then you may take a 50% tax credit on up to $10,000 in qualifying wages per employee. The wages included in this credit must have been paid after March 12, 2020 and before January 1, 2021. The maximum amount of qualified wages for each employee for all calendar quarters is $10,000 making the maximum credit for an Eligible Employer paid to any employee $5,000. The credit is applied against the employer’s portion of social security payroll taxes.

To apply for the Employee Retention Credit an employer will file within their Form 941 starting the second quarter of 2020. It is important to note that as an eligible employer you will not receive the credit in the form of cash assistance. The employer will instead be forgiven on the qualified portion of their social security payroll taxes. 

Is This Credit For You?

  • You have NOT or could not obtain the Paycheck Protection Program Loan.
  • You have met the definition listed below as being negatively impacted by COVID-19.
  • You have continued to pay employee wages and/or health plan expenses during the crisis and are seeking immediate relief.

The eligibility requirements to obtain this credit are very simple. Any business of any size may qualify as long as:

  1. The business’s operations must have been fully or partially suspended during the calendar quarter (you are applying for) as a result of shut down orders due to the COVID-19 Pandemic.

            OR

      2. The business’s gross receipts for the quarter (you are applying for) are 50% less than the gross receipts for the same quarter in the prior year.

**You will not be eligible for this credit if you have received The Paycheck Protection Program Loan**

What Wages Qualify?

Wages considered for the credit will only cover wages of full-time employees. An employee who averages 30 hours of service a week or 130 hours of service in a month is considered a full-time employee for that month based on IRS guidelines.

The wages will include health plan costs, paid to the employees not working during the applicable period.

All wages are applicable including health plan costs, paid to employees during the applicable period.

  • The IRS ruled that employers who continue to pay for health plan costs for furloughed employees during the applicable period (the period you as the employer are applying for on the Form 941) can treat these costs as qualified wages.
  • Qualified health plan costs are the costs paid by an eligible employer to maintain a group health plan to the extent that the amounts from the plan are excluded from the employee’s gross income.
            • Costs include the cost paid by the employer and the cost paid by the employee with pre-tax dollars.
            • For employers with 100 or less employees, all qualified health plan costs paid during the applicable period are considered qualified wages.
            • For employers with more than 100 employees, qualified health plan costs allocated to the time the employees are not working are considered qualified wages. 
  • Employers who operated all of 2019: Take the sum of the total number of full-time employees in each calendar month and divide by 12.
  • Employers who began business in 2019: Take the total number of full-time employees in each month and divide by the number of months in business. An employer must lump together employees with all related entities to determine when the employer has more than 100 employees.

What Wages Do Not Qualify?

  • Wages that exceed the amount paid to the same employee for working the same duration during the 30 day period preceding to the applicable period.
  • Wages paid to individuals who are related to the employer are not considered qualified wages.
  • Wages that the employer has received a credit for as qualified sick or family leave wages, paid family leave wages or the Work Opportunity Tax Credit. There is no "double dipping" when receiving assistance from government programs.

How Do You Claim Your Employee Tax Credit?

An employer is able to claim the Employee retention credit on the Form 941 starting the second quarter of 2020. All first quarter retention credits are to be claimed on the second quarter Form 941 as well.

The eligible employer will reduce its employment tax deposits during the specified quarter on the Form 941 for the employee retention credit amount. The credit amount may be used to reduce all employment withholding payments including: the employer’s share of social security and Medicare taxes, the employee’s share of social security and Medicare tax withholding and the employee’s federal income tax withholding.

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. 

An eligible employer may also receive an advance of the Employee Retention Credit to fund payment of qualifying wages if the federal employment taxes are not enough to cover the qualifying wage payments. 

To receive the advance payments, the qualified employee should file Form 7200, Advance Payment to Employer Credits to COVID-19.

Key Takeaways & Resources

  • Eligible employers may take 50% tax credit on up to $10,000 in qualifying wages per employee.
  • The Employee Retention Credit is FULLY refundable.
  • Qualifying wages can include health plan costs paid for furloughed employees.
  • Employers receiving and keeping a Paycheck Protection Program Loan are not eligible for the credit
  • Employers with more than 500 employees are eligible for the credit.

Information from this blog was pulled from The SC&H Group Resource Center and from the IRS General Information FAQs.

If you have additional questions regarding the Employee Retention Credit the IRS has created an informational frequently asked questions page specifically on this topic:  https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act

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