The Employee Retention Credit is designed to encourage businesses to keep employees on the payroll. The amount of the credit is 50% of the qualified wages paid employees up to an annual limit of $10,000 per employee, which equals a maximum credit amount of $5,000 for each employee for the year.
Who is eligible for the credit?
To be eligible for the credit, employers must operate a trade or business and must have experienced one of the following:
Operations that were fully or partially suspended because of a government order related to COVID-19; or
A significant decline in gross receipts in a calendar quarter when compared to 2019.
The credit is available to all employers (including tax-exempt organizations) regardless of size. Note, though, federal agencies, state and local governments, and businesses that receive Paycheck Protection Program (PPP) loans do not qualify for the credit.
How is the credit calculated?
The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, which means that an eligible employer can claim a maximum credit of $5,000 per employee.
Only wages paid between March 12, 2020 and January 1, 2021 are eligible.
Wages are not limited to cash payments, and also include a portion of the employer-provided health care costs.
Which wages qualify?
Qualified wages are based on the business's average number of full-time employees in 2019.
Small employers---those that had 100 or fewer employees---may receive the credit for wages paid to employees whether or not the employees are providing services to the employer.
Large employers---those that had more than 100 employees---may only receive the credit for wages paid to employees for time the employees are not providing services to the employer.
If an employer is eligible due to a full or partial suspension of operations, only wages paid while operations are suspended count as qualified wages.
How do eligible employers get the credit?
Employers must report qualified wages on their federal employment tax returns, usually on IRS Form 941, Employer's Quarterly Federal Tax Return (PDF). Employers can reduce their required deposits of payroll taxes withheld from employees' wages by the amount of the credit. Employers can also request an advance of the employee retention credit by submitting IRS Form 7200 (PDF). Eligible employers may use the employee retention credit together with other relief, such as payroll tax deferral, which may affect deposits and advances.
For more information, see the following resources:
COVID Tax Tip 2020-58 #IRSTaxTip