Employee Retention Tax Credit – What you need to know

What is it?  

In short, it’s a refundable payroll tax credit for 50 percent of "qualifying wages" paid by "qualifying employers" to employees between March 13, 2020, and Dec. 31, 2020.

The employee retention tax credit is not available to employers that receive loans under Paycheck Protection Program (PPP), so it is important to compare the benefits afforded by each.

Who qualifies?

  1. Any employers (regardless of size) operating a trade or business in the United States or conducting non-profit activities. 
  2. Company must have operations that are partially or fully suspended due to COVID-19, or have a decline in gross receipts by more than 50 percent compared to the same quarter in prior year.
  3. NOTE: If only the 50% decline in gross receipts test is satisfied, eligibility for the credit will terminate when gross receipts reach 80% of the prior year gross receipts for the same quarter.
  4. Qualifying wages for employers with 100 or less full-time employees include all wages (including healthcare costs), whether or not the employee is providing services to the employer. For larger employers, it includes only wages paid to employees who are not providing services “due” to COVID-19.
  5. Aggregation rules apply for purposes of determining the number of employees. Qualifying wages are capped at the first $10,000 paid to an employee. Thus, there is a $5,000 maximum tax credit per employee. Note, employers cannot only claim the credit for health care benefits and expenses if they are not paying any other wages to their employees.
  6. To the extent that the credit exceeds the employer portion of employment taxes due, the credit is treated as an overpayment and is refundable to the employer.

Simple IRS Example: Bob (Employer) paid $10,000 in qualified wages (including qualified health plan expenses) and, after deferral of the employer's share of social security tax, is otherwise required to deposit $8,000 in federal employment taxes for all of its employees for wage payments made during the same quarter as the $10,000 in qualified wages. Bob has no paid sick or family leave credits under the FFCRA. Bob may keep up to $5,000 of the $8,000 of taxes he was going to deposit, and will not owe a penalty for keeping the $5,000. Bob will later account for the $5,000 it retained when it files Form 941, Employer's Quarterly Federal Tax Return, for the quarter. (More information will be released regarding this filing)

As the PPP loan and employee retention tax credit cannot both be utilized, there are numerous factors that must be considered to maximize the relief your company will receive!

Keep in mind – If you have already received the PPP loan, you must be proactive and specifically request loan forgiveness. This can be done by submitting a request along with “proof” documents to your lender servicing the loan.

The IRS is expected to provide more information regarding the process for claiming the credit, and as more updates are issued in the following weeks, we will continue to provide guidance.