IRS Employee Retention Credit: What Employers Need to Know

The Internal Revenue Service launched the Employee Retention Credit to encourage businesses to keep employees on their payroll. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

What Businesses Qualify

The credit is available to all employers regardless of size, including tax-exempt organizations. State and local governments and their instrumentalities and small businesses who take small business loans do not qualify.

Employers must fall into one of two categories:

• Business is fully or partially suspended by government order due to COVID-19 during the calendar quarter
• Gross receipts are below 50% of the comparable quarter in 2019; if gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter
• Measures are calculated each calendar quarter

How Credit is Calculated

Credit is 50% of qualifying wages paid up to $10,000 in total for wages paid after March 12, 2020, and before Jan. 1, 2021. Wages are not limited to cash payments, and also include a portion of the cost of employer provided health care.

Qualifying Wages

Qualifying wages are based on the average number of a business’s employees in 2019.

• Employers with less than 100 employees in 2019: Credit is based on wages paid to all employees, regardless if they worked or not; if employees worked full time and were paid for full time work, employers still receive the credit
• Employers with more than 100 employees in 2019: Credit is allowed only for wages paid to employees who did not work during the calendar quarter

How Employers Can Receive Credit

• Will be immediately reimbursed by reducing their required payroll tax deposits withheld from employees’ wages by the amount of the credit
• Must report their total qualified wages and related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter
• If employment tax deposits are not sufficient to cover the credit, employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19

More updates on the Employee Retention Credit, Tax Credits for Required Paid Leave and other information can be found on the IRS Coronavirus page.