To counteract the effects COVID-19 is having on the economy and businesses, the Internal Revenue Service recently announced the Employee Retention Credit. This refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer impacted by COVID-19. Wages between March 12, 2020 and December 31, 2020 are eligible for the credit. Wages includes the employer’s portion of healthcare costs.
All employers, regardless of size, are eligible for the credit, including tax-exempt organizations. However, state and local governments and businesses with small business loans are ineligible. Credit eligibility is calculated each calendar quarter. To qualify, a business must:
- The business has been fully or partially suspended by government order due to COVID-19 during the calendar quarter or;
- Gross receipts are below 50% of the comparable quarter in 2019. You will no longer qualify when your gross receipts go above 80% of a comparable quarter in 2019 after the end of that quarter.
Qualifying wages are based on the average number of a business’s employees in 2019. For businesses with 100 or fewer employees, the credit is based on wages paid to all employees, even if they didn’t work. For business’s with more than 100 employees, the credit is only for wages paid to employees who did not work during the calendar quarter.
The credit is immediately available by reducing required payroll taxes withheld from employees’ wages by the amount of the credit.
Report total qualifying wages and health insurance costs for each quarter on quarterly employment tax returns or Form 941 beginning with the second quarter. If tax deposits don’t 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.