What Small Businesses Need to Know About the Employee Retention Tax Credit

An announcement from the IRS promises even more assistance for small and medium-sized businesses. The IRS is providing a new tax credit for organizations that retain their workers during the COVID-19 crisis. It works by allowing a refundable tax credit against upcoming employment taxes. Businesses can receive half (50%) of the employment taxes due for staff wages that qualify. This applies to wages they have paid after March 12, 2020, and through January 1, 2021.

Employers get immediate credits by reducing the amount of employment tax deposits they have to make. In addition, if SMBs don’t have the funds to make their current tax deposits, they may request an advance payment from the IRS.

What wages are eligible?

Each employee’s wages and some health plan costs up to $10,000 per staff member can be used to calculate the amount of the 50% credit.

Each employee’s wages and some health plan costs up to $10,000 per staff member can be used to calculate the amount of the 50% credit. SMBs can apply the credit to wages and healthcare coverages they have paid beginning March 12 and through the end of the year. They can also access a retroactive credit to reduce upcoming tax deposits.

Employers who can’t meet their future payroll taxes can request an advance credit. SMBs can access Form 7200, Advance of Employer Credits Due To COVID-19 to apply.

What triggers eligibility? 

SMBs and tax-exempt organizations are eligible for the credit if they were open for business in 2020 and the following apply:

• They needed to fully or partially suspend operations because of government shutdowns due to COVID-19
• They experienced a significant decline in gross receipts

A significant decline in gross receipts begins on the first day of the first calendar quarter where gross receipts were less than 50% of the same calendar quarter for 2019. The significant decline in gross receipts ends on the first day of the first calendar quarter following the calendar quarter where gross receipts are more than 80% of the same calendar quarter for 2019.

The credit is applicable to all wages that qualify — including some health care expenses — occurring this time frame or any quarter where the company suspended their operations.

What wages qualify? 

Wages the relief covers vary based on the size of the organization. For businesses that had more than 100 full-time employees in 2019, qualified wages are funds paid to employees (and some healthcare costs) up to $10,000 for each employee who is laid off because of closures or declines in revenue. The amount can only include what the employer would normally pay the employee during the 30 days immediately prior to the closure or period of economic hardship.

For businesses with 100 or less full-time employees in 2019, qualified wages include any salary, and some healthcare costs, up to $10,000 per employee who is either laid off because of closures or decline in revenue or still working for the employer.

Taxes available for the credits include:

• Withheld federal income taxes
• Employee and employer share of Social Security and Medicare taxes

Qualified health plan expenses

Qualified health plan expenses are the amounts an employer pays to provide group healthcare coverage for staff members. More detailed information about qualified health care expenses is available on the IRS website.

Some exclusions apply

There are some limits to eligibility under the Employee Retention Credit. They include:

• Employers who are currently a recipient of a Small Business Interruption Loan under the Paycheck Protection Program provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act are ineligible for the Employee Retention Credit
• If an employer receives a Small Business Interruption Loan, wages eligible for the credit do not include wages paid if the employer has already received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act
• Wages for paid family and medical leave under section 45S of the Internal Revenue Code cannot count towards the Employee Retention Credit
• Employees of a business that receives a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code also do not qualify

How to apply for the credit 

To claim the new Employee Retention Credit, eligible employers should report their total qualified wages and healthcare costs for each quarter on their quarterly employment tax returns — generally Form 941 — beginning with the second quarter. The credit is taken against the employer’s share of social security tax: any excess is refundable under normal procedures. Details on completing the form are available on the IRS website.

To claim the new Employee Retention Credit, eligible employers should report their total qualified wages and healthcare costs for each quarter on their quarterly employment tax returns — generally Form 941 — beginning with the second quarter.

For businesses who anticipate claiming the credit, they may retain the amount of the employment taxes they otherwise would have deposited. This includes federal income tax withholding and the employees’ and employers’ share of Social Security and Medicare taxes up to the amount of the credit. There is zero penalty, provided they complete the necessary forms. This includes any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act.

Eligible employers can also request an advance on the Employee Retention Credit by filling out and submitting IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19. Detailed instructions on how to complete the form are available on the IRS website.