Employee Retention Tax Credit

Section 2301 of the CARES Act, the Employee Retention Tax Credit was designed to help businesses who are closed, partially closed, or are dealing with substantial revenue losses due to COVID-19.

If you received a Paycheck Protection Loan, you are not eligible for a tax credit [1].

Eligibility

Private Employers, including non-profits, regardless of size, whose business was active and operating in 2020 are eligible if they:

  • Were fully or partially suspended by government order due to COVID-19
  • Employer’s gross receipts are below 50% of comparable 2019 quarter. If the employer’s receipts go above 80% of a comparable 2019 quarter, they no longer qualify after the end of that quarter [2].

You are ineligible if you are

  • A governmental employer (state or local) and their instrumentalities
  • Self-employed individuals
  • A small business who has taken a small business loan (Paycheck Protection Program included)

Tax Credit Amount

This is a 50% tax credit for the first $10,000 of compensation, including the employer portion of health benefits for each eligible employee. This does not include paid sick or family leave (which is reimbursed under the FFCRA – Families First Coronavirus Response Act, and is reduced by Employer Credit for paid family and medical leave, IRC Section 45S [3][4]). This credit is applicable only to wages paid after March 12, 2020 and before January 1, 2021.

Who is an Eligible Employee? What is a Qualifying Wage?

The wages are based on the average number of employees in 2019 and include cash payments and a portion of the cost f employer provided health care.

Less than 100 full time employees: all full-time employees that were paid for full time are eligible whether they worked or not.

More than 100 full time employees: any full-time employees that are being paid but cannot work due to full or partial closure or a reduction in gross receipts [5]. The credit is allowed only for wages paid to employees who did not work during the calendar quarter [6].

How does one Receive the Credit?

Employers can immediately receive this credit by reducing the amount of payroll taxes they have withheld from employees’ wages that they would normally deposit to the Treasury [7].

The IRS states “Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.” [8]

Please visit the IRS FAQs section for questions, and the US Chamber of Commerce’s guide for details. Please feel free to contact us with any questions. All information is subject to updates!

All information used in this post was found and provided by the following:

https://www.uschamber.com/report/guide-the-employee-retention-tax-credit

https://www.uschamber.com/sites/default/files/uscc_covid19_employee-retention-tax-credit.pdf

https://home.treasury.gov/system/files/136/Employee-Retention-Tax-Credit.pdf

https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19

https://www.adp.com/spark/articles/2020/03/covid-19-emergency-legislation-offers-substantial-relief-to-employers.aspx#


[1] CARES Act, Section 2301 EMPLOYEE RETENTION CREDIT FOR EMPLOY-2ERS SUBJECT TO CLOSURE DUE TO COVID-19., Part (j) RULE FOREMPLOYERSTAKINGSMALLBUSINESS4INTERRUPTIONLOAN.

[2] https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19

[3] https://www.adp.com/spark/articles/2020/03/covid-19-emergency-legislation-offers-substantial-relief-to-employers.aspx#

[4] https://www.law.cornell.edu/uscode/text/26/45S

[5] https://www.uschamber.com/sites/default/files/uscc_covid19_employee-retention-tax-credit.pdf

[6],[7] https://home.treasury.gov/system/files/136/Employee-Retention-Tax-Credit.pdf

[8] https://www.irs.gov/newsroom/irs-employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid-19