In a previous blog, we outlined a provision from the IRS to offer employers Payroll Tax Deferments as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act). Another recent provision made available through the IRS is the Employee Retention Credit. Here we will discuss the particulars on this type of relief.
What is it? According to the IRS, the Employee Retention Credit is a refundable tax credit against the employer portion of social security taxes, equal to 50% of qualified wages an eligible employer pays to employees between March 13, 2020 through December 31, 2020. The amount of qualified wages per employee (for all calendar quarters) caps at $10,000, meaning the maximum allowable credit per employee is $5,000.
Depending on the size of your organization, the definition of “qualified wages’” varies. According to the IRS, if an eligible employer averaged more than 100 full-time employees in 2019, qualified wages would be the wages paid for the time that the employee did not work during the period of economic hardship. If the business averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee, regardless of whether they worked or not, during the period of economic hardship.
Who qualifies for this credit? Employers, including tax-exempt organizations, qualify for this credit if they were in operation during 2020 and had payroll. To be eligible, your business must have experienced either:
a) The full or partial suspension of the operating of your trade/business because of governmental orders limiting commerce, travel or group meetings due to COVID-19, or
b) A significant decline in gross receipts.
However, if you are an employer who has received a Paycheck Protection Plan (PPP) Loan, you are not eligible to claim the Employee Retention Credit.
How much of a credit can I expect? The amount varies by employer. In addition to calculating the qualified wages per employee, you will also need to determine when during the calendar year you experienced a “significant decline in gross receipts”.
This “declining” period begins in the first calendar quarter in which an employer’s gross receipts for the quarter are less than 50% of it’s gross receipts for the same period in 2019. This declining period ends in the first calendar quarter that an employer’s gross receipts are greater than 80% of it’s gross receipts for the same period in 2019.
The IRS FAQ Guide offers an example of how this period is determined:
“An employer’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, the employer’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively.
Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus the employer is entitled to a retention credit with respect to the first and second calendar quarters.”
How do I claim this credit? To claim the credit, eligible employers would report both the qualified wages and the related credit for each calendar quarter on their federal employment tax returns. For most employers, this would be Form 941, Employer’s Quarterly Federal Tax Return.
There also is a provision to request an advance of the credit by completing and submitting IRS Form 7200 – Advance Payment of Employer Credits Due to COVID-19.
If you are using a third-party platform to run your payroll and file your quarterly returns, we recommend reaching out to their support team immediately regarding how to claim this tax credit.
Note: The information provided in this blog does not, and is not intended to, constitute legal or tax advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information in this blog may not constitute the most up-to-date information. This blog contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.