What are the basics?
Eligible employers receive a refundable quarterly payroll tax credit equal to 50% of the “qualified wages” paid with respect to each employee. The credit is allowed against the employer portion of Social Security taxes and the portion of taxes imposed under the Railroad Retirement Act that corresponds to Social Security taxes.
“Qualified wages” depend on the average number of full-time employees the employer had during 2019. If the employer had more than 100 full-time employees, “qualified wages” are wages paid when the employee is not providing services due to the employer’s economic hardship (see criteria 1 and 2, below, under “Who is eligible?”). For these employers, “qualified wages” taken into account for an employee may not exceed the amount the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. If the employer had 100 or fewer full-time employees, all employee wages paid during the period of economic hardship are “qualified wages.” For purposes of determining the number of full-time employees an employer had during 2019, aggregation rules apply that could require companies with common ownership to be treated as a single employer.
Allocable health plan expenses can be treated as wages when computing the credit.
Are there limitations?
Yes. The amount of qualified wages that may be taken into account per employee for all calendar quarters cannot exceed $10,000. In addition, qualified wages do not include qualified sick or family leave wages under the FFCRA.
Employers are not eligible for employee retention tax credits if they receive a small business interruption loan under the Paycheck Protection Program of the CARES Act.
Who is eligible?
An “eligible employer” is any employer, including a tax-exempt organization, that was carrying on a trade or business during calendar year 2020 and meets one of the following criteria:
- The operation of the business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental agency limiting commerce, travel, or group meetings because of COVID-19; or
- The calendar quarter is within the period that: (1) begins with the first calendar quarter after December 31, 2019, for which gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year; and (2) ends with the calendar quarter following the first calendar quarter for which gross receipts are greater than 80% of gross receipts for the same calendar quarter in the prior year.
The operation of a business is “partially suspended” if the business can continue to operate, but not at its normal capacity.
Governmental employers, including the federal government, state and local governments, and governmental agencies and instrumentalities, are not eligible employers. Self-employed individuals also are not eligible for the employee retention tax credit.
When does it take effect?
The employee retention tax credit applies to wages paid after March 12, 2020, through and including December 31, 2020.
How do I claim the tax credits?
Employers report their total qualified wages and related credits for each calendar quarter on Form 941. However, employers can benefit more quickly by reducing their federal employment tax deposits. Employers are entitled to retain an amount of all federal employment taxes equal to half the qualified wages paid rather than depositing them with the IRS.
If the federal employment taxes set aside to deposit are insufficient to cover the amount of the tax credits, the employer may request an advance payment of the credits from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
