COVID-19, aka coronavirus, has become a global pandemic, posing a threat to not only the lives of millions but has gravely shaken the global economy as well.
So, as means of retaining employees and keeping them on payroll, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) have come up with an employee retention credit.
What is Employee Retention Credit?
CARES Act has enacted the employee retention credit, also known as the refundable payroll tax credit for "Qualified Wages" that eligible employers receive on retaining employees between March 13 and December 31, 2020.
It says, retain your employees and receive a 50% payroll tax credit!
The act's main intent is to encourage employers to keep their employees on payroll even if they are not working during this pandemic. Doing which eligible businesses can claim a tax credit of 50% of the first $10,000 of each qualified employee’s wages (including qualified health plan costs). To make it even clear, they would receive up to $5,000 per full-time employee retained between Mar 13 and Dec 31, 2020.
Who is eligible for this credit?
Any employer including a tax-exempt organization who carry on a trade or a business during the calendar year 2020 are eligible to claim for this credit under two conditions:
1. If your business's operations are fully or partially suspended due to COVID-19.
2. If you experienced a significant decrease in gross receipts. Your gross receipts are under 50% of last year’s during the same quarter, and after the first quarter, your gross receipts recover to 80% or more.
This credit is applicable only to qualified wages (including certain health plan expenses) that are paid during this period or any quarter in which business operations were suspended.
Now, as we have come across the term qualified wages several times, let’s take a look at what it is?
Qualified wages depend on the number of employees employers have employed during the year 2019. The number of full-time employees in an organization determines how many employees tax credits can be claimed.
If there are more than 100 full-time employees, credit can be claimed for employees who are not working. In case there are less than 100 full-time workers, then the credit can be claimed for all employees, irrespective of whether they are working or not.
But, please note that the Employee Retention Credit applies only to full-time workers.
Organizations exempt from CARES act
There are a few exemptions like self-employed individuals, government employers, or any small business who have already applied for the Paycheck Protection Program (PPP) are not eligible for this credit.
Similarly, you cannot claim Employee Retention Credit if you have already received a tax credit for paid sick and family leave under the FFCRA (Families First Coronavirus Response Act ) act.
Amount of Credit
So, how much is an employer eligible to claim a credit is what we will see below.
An eligible employer will receive a credit of 50% of up to $10,000 in qualified wages (including health insurances paid) for every full-time worker between March 13 and December 31, 2020. To be precise, the credit would come around $5,000 per employee during this period.
Please do note that the credit will be applied to the employer's portion of Social Security taxes and is refundable. It means that if the credit amount is more than the payroll taxes, the excess amount is refundable.
How to claim the credit?
In order to claim the credit and receive an advance payment from the IRS, eligible employers must report their qualified wages, including health insurance costs on their quarterly employment tax return form, Form 941. Before you claim, it is required you follow these steps:
1. Calculate your credit amount, including the health insurance costs for the preceding quarter, and check your payroll tax deposit amount. If your credit is lesser than the payroll taxes, reduce your Form 941 deposit by that amount.
For example, If your credit for Q1 2020 is $10,000 and the amount you are scheduled to deposit is $15,000, reduce the deposit by $10,000 and deposit $5,000 within April 30, 2020.
2. If your credit amount for the first quarter is higher than the amount withheld for payroll taxes, you can receive an advance payment of the excess amount from the IRS by submitting Form 7200 Advance Payment of Employer Credits Due to COVID-19.
For example, If your credit for the first quarter was $15,000 and your payroll taxes for that quarter was $10,000, then the excess amount of $5,000 can be claimed as an advance from the IRS for the next quarter by submitting Form 7200.