Employers: 3 things to know about the Employee Retention Credit
In response to the financial crisis caused by COVID-19, the newly enacted CARES Act has created a new payroll-related form of relief for employers. Coined The Employee Retention Credit, this relief measure allows eligible employers to obtain a refundable credit against the employer-only portion of social security taxes (or Railroad Retirement Tax Act taxes).
Question #1: What is an eligible employer
An employer carrying on a trade or business in 2020 is eligible for the Employee Retention Credit if:
(1) The employer had to fully or partially suspend its business operations during the calendar quarter because of a COVID-19-related governmental order that limited commerce, travel, or group meetings, or
(2) The employer meets the “gross receipts” test. This test is satisfied gross receipts for a 2020 quarter is less than 50% of gross receipts for the same 2019 quarter. The employer’s eligibility for the credit ends with the 2020 quarter in which gross receipts exceed 80% of the same 2019 quarter.
Question #2: How much of a credit is available?
The credit allows for 50% of qualified wages, up to $10,000. Qualified wages are defined based on the employer’s size. Employers with 100 or less employees the credit is based on the wages paid to all employees. Employers with over 100 workers can only use the credit for employees who were unable to work because of COVID-19-related business suspension or gross receipts decline.
Question #3: How do I get the credit?
The IRS has provided that:
Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s portion of social security and Medicare tax.
Employers can also receive an advance refund for the anticipated credit by filling out Form 7200: Advance Payment of Employer Credits Due to COVID-19. This option is available for those employers who do not have enough federal employment taxes set aside for deposit.