The Employee Retention Credit is a refundable tax credit employers can use against certain employment taxes. The credit allows eligible employers to receive up to 50 percent of the qualified wages paid to employees (including certain health plan costs) between March 12, 2020 and January 1, 2021, limited to a maximum of $10,000 per employee.
Employers struggling in the midst of the COVID-19 pandemic can receive immediate access to the Employee Retention Credit by reducing employment tax deposits they are otherwise required to make. If the reductions in employment tax deposits are not sufficient to cover the credit, employers may also request an advance credit payment from the IRS by submitting IRS Form 7200 (Advance of Employer Credits Due To COVID-19.
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and either:
Experience the full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19; or
Experience a significant decline in gross receipts.
Determining a Significant Decline in Gross Receipts
A significant decline in gross receipts begins:
On the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.
For example, if an employer had $50,000 in gross receipts during the second quarter of 2019 (April 1st through June 30th), but only $15,000 in gross receipts during the second quarter in 2020, then the employer's significant decline in gross receipts began in the second quarter of 2020.
The significant decline in gross receipts ends:
On the first day of the first calendar quarter following the calendar quarter in which gross receipts are more than of 80% of its gross receipts for the same calendar quarter in 2019.
An employer may claim the Employee Retention Credit for the period it experiences a significant decline in gross receipts (or for the duration of any calendar quarter in which operations were suspended due to COVID-19).
The definition of qualified wages depends on an employer's total number of full-time employees.
More than 100 full-time employees
If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally defined as those wages paid to employees (up to $10,000 per employee) who are not providing services because either: (a) operations were suspended; or (b) the employer experienced a significant decline in gross receipts. These employers may only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
100 full-time employees or less
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are defined as those wages paid to any employee (up to $10,000 per employee) during either: (a) the period operations were suspended; or (b) the period of significant decline in gross receipts, regardless of whether or not its employees are providing services.
Claiming the Employee Retention Credit
In order to claim the new Employee Retention Credit, eligible employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns---IRS Form 941 for most employers---beginning with the second quarter. The credit is offset against the employer's share of social security tax but any excess is refundable to the employer under normal circumstances.
In anticipation of claiming the credit, employers are allowed to retain a percentage of employment taxes, up to the amount of the credit, that they would otherwise be required to deposit with the IRS (e.g., federal income tax withholding, the employees' share of social security and Medicare taxes, and the employer's share of social security and Medicare taxes). Note, however, employers must also take into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act.
Eligible employers can also request an advance of the Employee Retention Credit by submitting IRS Form 7200 (Advance of Employer Credits Due To COVID-19.
Impact of other credit and relief provisions
An eligible employer's ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
An employer is not eligible for the Employee Retention Credit if the employer received a Small Business Interruption Loan under the Paycheck Protection Program.
Qualified wages for the Employer Retention Credit do not include wages that were already counted towards the tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
Qualified wages counted for the Employee Retention Credit cannot also be counted for the tax credit for paid family and medical leave under Section 45S of the Internal Revenue Code.
An employee cannot be counted for this credit if the employer is allowed a Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code for the employee.
For more information, see the following resources:
About the Author
Attorney Jordan D. Howlette is the President of MyTaxRights, LLC and the managing-member of JD Howlette Law, LLC, a civil litigation firm that represents individuals and businesses involved in tax disputes with the IRS, the United States Department of Justice (DOJ), and various state departments of revenue. A former trial attorney with the DOJ’s Tax Division, Jordan leverages his extensive background in tax litigation to educate others about their federal tax rights and responsibilities. Each tax season, Jordan also volunteers as a tax coach with the Center for the Advancement of Tax Equity, where he teaches others how to self-prepare and file their taxes through the non-profit's free tax clinics.