Employee Retention Credit Available To Businesses Affected By COVID-19

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  • Contributors:
  • Derik Rynearson
Business owner researching Employee Retention Credit

The passing of the Coronavirus Aid, Relief, and Economic Security (CARES) Act created yet another incentive for businesses to keep employees on their payroll – the Employee Retention Credit. This tax credit applies to businesses whose operations have been impacted by government executive orders or are experiencing a remarkable decline in revenue.

Here’s what you need to know if you’re considering claiming this credit.

What is the Employee Retention Credit?

It’s a fully refundable tax credit for 50% of qualified wages you pay employees. It’s applied to your federal payroll tax liability. Any excess credit amount is refundable.

How does the credit work?

The credit is 50% of all qualified wages you pay employees between March 12, 2020, and December 31, 2020. It’s limited to $10,000 in wages per employee for all quarters. Therefore, you can claim a maximum credit of $5,000 for each employee.

How do you calculate the credit amount for each employee?

You calculate the credit based on wages you pay your employees each quarter. Let’s walk through some examples.

  1. You pay Keith $10,000 in the second quarter of 2020. The credit amount available to you is 50% of qualified wages – $5,000. You’ve hit the maximum credit limit for Keith in Q2. Any additional wages you pay to him in 2020 don’t increase the credit amount you can claim.
  2. You pay Kelly $8,000 in the second quarter of 2020. You pay her $6,000 in the third quarter. Your Employee Retention Credit is $4,000 in Q2 and $1,000 in Q3. Once you hit the $5,000 cap, any additional wages you pay Kelly won’t increase your credit amount.

What are qualified wages?

Generally, qualified wages are compensation you pay to employees, including qualified health plan expenses. But, the definition also depends on your average number of full-time employees in 2019.

If your average was more than 100 full-time employees, qualified wages are the wages you paid to employees who aren’t providing services because of:

  • A full or partial suspension of operations by order of a governmental authority due to the coronavirus
    OR
  • A significant decline in gross receipts

If you fall within this category, the qualified wages can’t exceed what you would have paid the employee for an equivalent duration during the 30 days preceding your economic hardship.

If your average was less than 100 full-time employees, qualified wages are the wages you paid to any employee because of:

  • A full or partial suspension of operations by order of a governmental authority due to the coronavirus
    OR
  • A significant decline in gross receipts

If you fall within this category, qualified wages aren’t impacted by whether an employee is or isn’t working. Any employee you continue to pay affects your credit amount.

Am I eligible for this credit?

Businesses and tax-exempt organizations operating in 2020 can claim this credit. However, they must have:

  • Fully or partially suspended business operations for any calendar quarter in 2020 due to governmental orders limiting commerce, travel, or group meetings due to COVID-19
    OR
  • Experienced a significant decline in gross receipts during a calendar quarter in 2020

For example, Michigan Governor Gretchen Whitmer signed an executive order in March 2020 directing businesses to suspend operations that aren’t necessary to sustain or protect life. If businesses had to temporarily change how they do business to comply with this order, they’re eligible for this credit.

If you’re a governmental employer or self-employed individual, you’re not eligible for this credit.

What’s a significant decline in gross receipts?

A significant decline is a 50% decrease in gross receipts for the same calendar quarter in the previous year. For example, you have $250,000 in gross receipts in Q1 of 2019. In 2020, your gross receipts for Q1 are $100,000. That’s more than a 50% decrease and marks the start of a significant decline.

The significant decline ends with the first calendar quarter where your 2020 gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019. Let’s say in Q3 of 2019 your gross receipts were $200,000. In Q3 of 2020, your gross receipts are $180,000.

Your gross receipts are more than 80% of Q3 2019 gross receipts, so your significant decline period has ended. Therefore, you can only claim the credit for Q1 and Q2 of 2020.

Gross receipts are your total revenue without subtracting returns or discounts, operating expenses, or unpaid invoices. It’s strictly the total amount of revenue your business collects in a tax year.

How do you claim the Employee Retention Credit?

You’ll report your qualified wages and related credits for each calendar quarter of your federal employment tax returns via Form 941, Employer’s Quarterly Federal Tax Return. You use Form 941 to report income, social security, and Medicare taxes you withhold from employee wages and your portion of social security and Medicare tax.

How can I pay my employees?

If you expect to receive this credit, you can pay employees by reducing your federal employment tax deposits. If you do this, you won’t be subject to a deposit penalty. You may also request an advance of the credits to help fund employee compensation. To request an advance, file Form 7200 with the IRS.

What else do I need to know about the Employee Retention Credit and other coronavirus-related benefits?

You can claim both the Employee Retention Credit and the tax credit for providing paid leave under the Families First Coronavirus Response Act (FFCRA). However, you can’t use the credits for the same wages. You can’t include the paid leave wages under the FFCRA in your calculation of qualified wages for the Employee Retention Credit. Keep them separate.

And, if you apply for a paycheck protection loan under the CARES Act, you can’t claim the Employee Retention Credit.

View more frequently asked questions about the Employee Retention Credit here.

 

Have questions about the Employee Retention Credit? Let’s talk!