UPDATE: Employee Retention Credit Available for Businesses Impacted by COVID-19
The Treasury Department and IRS have launched the Employee Retention Credit to encourage businesses to keep employees on their payroll. The refundable tax credit is 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.
The credit is available to all employers regardless of size, including tax-exempt organizations. The only exceptions are state and local governments and their instrumentalities, as well as small businesses who take small business loans.
Qualifying employers must fall into one of two categories. The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or the employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019, they no longer qualify after the end of that quarter. These measures are calculated each calendar quarter.
The amount of the credit is 50 percent of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020 and before Jan. 1, 2021 are eligible. Wages taken into account are not limited to cash payments; they also include a portion of the cost of employer-provided health care.
Qualifying wages are based on the average number of a business’ employees in 2019. If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter.
If the employer’s employment tax deposits are not sufficient to 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. Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Nov. 19, 2020 Update
On Nov. 16, 2020, the IRS issued two new Frequently Asked Questions (FAQs) on the Employee Retention Credit and its interaction with other COVID-19 relief provisions. Specifically, the two new FAQs address the eligibility of a business (the Acquiring Employer) that acquires another business (the Target Employer), either through the acquisition of equity interests or the assets of the Target Employer, to continue to utilize the Employee Retention Credit when the Target Employer had received a Paycheck Protection Program (PPP) loan. As a reminder, FAQ 81 of the IRS guidance states, “An employer that receives a PPP loan may not receive an Employee Retention Credit, regardless of whether and when the loan is forgiven.” The new FAQs were issued to address situations where an Acquiring Employer did not have a PPP loan, but acquired an entity that does have a PPP loan.