What You Should Know About the Employee Retention Tax Credit

The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of qualified wages paid to employees by an eligible firm between March 12, 2020, and January 1, 2021. Employers who are eligible for the credit can get it right away by reducing the amount of employment tax deposits they are required to make. In addition, if the employer's employment tax deposits are insufficient to satisfy the credit, the IRS may give the employer an advance payment.

Wages (including certain health plan costs) up to $10,000 can be counted for each employee to determine the amount of the 50% credit. Many struggling employers can receive this benefit by lowering upcoming contributions or requesting an advance credit on Form 7200, Advance of Employer Credits Due to COVID-19, because it can apply to wages previously paid beyond March 12, 2020.

Employers, including tax-exempt organizations, are eligible for the credit if they run a trade or company in 2020 and experience one of the following:

a complete or partial cessation of their trade or activity during any calendar quarter as a result of governmental directives restricting commerce, travel, or group meetings as a result of COVID-19, or a significant drop in gross receipts

The following are the first signs of a large drop in gross receipts:

on the first day of the first calendar quarter of 2020 in which an employer's gross receipts are less than half of what they were in the comparable calendar quarter of 2019.

The large drop in gross receipts comes to an end:

on the first day of the first calendar quarter after the calendar quarter in which gross receipts exceed 80% of gross receipts in the previous calendar quarter.

The credit is available for qualified wages (including certain health-plan expenses) paid during this time or any calendar quarter in which operations were halted.

Wages that are Qualified Employee Retention Credit 2021 Qualifications

The definition of qualified wages is determined by the number of employees employed by an eligible firm.

Qualified wages are generally those earnings (up to $10,000 per employee) provided to employees who are not providing services because operations have been ceased or because gross receipts have decreased if a firm averaged more than 100 full-time employees in 2019. Employee retention tax credit 2021, These employers can only count wages up to the amount an employee would have been paid for working a comparable amount of time in the 30 days prior to the period of economic hardship.

If an employer had 100 or fewer full-time employees on average in 2019, eligible wages are those earnings (up to $10,000 per employee) paid to any employee during the period operations were ceased or gross receipts fell, regardless of whether or not those employees were delivering services.

Other Credit and Relief Provisions' Impact - Employee Retention Credit Deadline

Other credit and relief provisions affect a qualified employer's ability to claim the Employee Retention Credit as follows:

Employers who receive a Small Business Interruption Loan through the CARES Act-authorized Paycheck Protection Program are not eligible for the Employee Retention Credit.

Wages for this credit do not include wages for which the employer earned a tax credit under the Families First Coronavirus Response Act for paid sick and family leave.

Wages used to calculate this credit cannot be used to calculate the credit for paid family and medical leave under Internal Revenue Code section 45S.

If the employer is eligible for a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code, the employee is not counted for this credit.

Taking Credit for It - How to Calculate Employee Retention Credit

To claim the new Employee Retention Credit, eligible firms must submit their total qualified salaries and related health insurance costs on their quarterly employment tax returns, which for most employers will be Form 941 beginning in the second quarter. The credit is applied to the employer's portion of Social Security tax, although any excess is refundable under normal circumstances.

Employers can keep a corresponding amount of employment taxes that would have been deposited otherwise, including federal income tax withholding, the employees' share of Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees, up to the credit amount, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave.

Form 7200 can be used by eligible companies to request an advance of the Employee Retention Credit.