The new Employee Retention Credit rolled out by the IRS and the Treasury Department is 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.
Does my business qualify to receive the Employee Retention Credit?
Most likely. The credit is available to all employers, including tax-exempt organizations, with two important exceptions: State and local governments and small businesses who take small business loans. Your business must be either: (1) fully or partially suspended by the government order due to COVID-19, or (2) gross receipts must be below 50% of the comparable quarter in 2019. If your gross receipts surpass 80% of a comparable quarter in 2019, you no longer qualify at the end of that quarter.
How is the Employee Retention Credit calculated?
The credit amount is 50% of qualifying wages, paid up to $10,000 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 and also include a portion of the cost of employer-provided healthcare, if any.
How do I know which wages qualify?
What wages qualify is based on the average number of your employees in 2019. If you had 100 or fewer employees on average, the credit is based on wages paid to all employees, regardless of whether they worked or not. If the employees were full-time and paid for full-time work, you still receive the credit. If you had more than 100 employees on average, then the credit is only allowed for wages paid to employees who did not work during the calendar quarter.
How can I receive my credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.
You will report your total qualified wages and the related health insurance costs for each quarter on your quarterly employment tax returns or Form 941 beginning in the second quarter. If your tax deposits are not sufficient to cover the credit, you may receive an advance payment from the IRS by submitting Form 7200.
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This Wandro & Associates Update is intended to inform firm clients and friends about legal developments, including recent decisions of various courts and administrative bodies. Nothing in this Practice Update should be construed as legal advice or a legal opinion, and readers should not act upon the information contained in this Update without seeking the advice of legal counsel.
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