EMPLOYEE RETENTION CREDIT FOR EMPLOYERS (CARES ACT, SECTION 2301)

Employee retention credit: The employee retention credit is available for employers that close or have much-reduced gross receipts due to the coronavirus pandemic. The credit is designed to encourage businesses to keep employees on their payroll by providing a refundable tax credit of 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. (For more, see “Guidance on Employee Retention Credit,” below.)

The Employee Retention Credit is a refundable tax credit for 50% in "qualified wages" (up to a $10,000 cap) paid to each employee by an "eligible employer" whose business has been financially impacted by COVID-19. This means that an eligible employer receives a $5,000 credit for each employee who is paid $10,000 or more in qualified wages paid or incurred from March 13, 2020 through December 31, 2020.

Filing Form 7200

According to the IRS, employers can file the form for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages. Employers are permitted to file Form 7200 several times during each quarter. Employers should not file Form 7200 after they file Form 941, Employer’s Quarterly Federal Tax Return, for the fourth quarter of 2020, or file Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, Employer’s Annual Federal Tax Return, or Form CT-1, Employer’s Annual Railroad Retirement Tax Return, for 2020 and should not file the form to request advance credits for any anticipated credit for which the employer has already reduced its employment tax deposits.

Employers file Form 7200 by faxing the completed form to 855-248-0552.

The IRS also issued its first informal guidance on the employee retention credit, which was just enacted last week (IR-2020-62).

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

General Guidance on employee retention credit

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% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter.

These measures are calculated each calendar quarter.

The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages also include a portion of the cost of employer-provided health care.

Qualifying wages are based on the average number of a business’s employees in 2019. However, for purposes of the credit, eligible wages do not include wages counted for purposes of the paid sick leave and paid family leave payroll tax credits. Also, if an employer receives a covered paycheck protection program loan under Section 1102 of the CARES Act, the employer is not eligible to claim an employee retention credit.

Employers with fewer than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.

Employers with more than 100 employees: 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 exceed the credit, the employer may receive an advance payment from the IRS by submitting Form 7200.

What are "qualified wages" under the Employee Retention Credit?

As explained by the IRS Employee Retention Credit FAQs, qualified wages are wages (as defined in Section 3121(a) of the Internal Revenue Code) and compensation (as defined in IRC Section 3231(e)) paid by an eligible employer to employees after March 12, 2020 and before January 1, 2021. Under the Act, qualified wages include the eligible employer's qualified health plan expenses that are properly allocable to the wages.

The calculation of the amount of qualified wages depends, in part, on the average number of full-time employees (as defined in Section 4980H of the Code) employed by the eligible employer during 2019.

If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (a) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (b) a significant decline in gross receipts. Qualified wages may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (a) and (b) above.

What is the Employee Retention Credit for Employers under the CARES Act?

The Employee Retention Credit is a refundable tax credit for 50% in "qualified wages" (up to a $10,000 cap) paid to each employee by an "eligible employer" whose business has been financially impacted by COVID-19. This means that an eligible employer receives a $5,000 credit for each employee who is paid $10,000 or more in qualified wages paid or incurred from March 13, 2020 through December 31, 2020.

Who are "eligible employers" for the Employee Retention Credit?

The credit is available to all employers in the US (including all nonprofit organizations) whose (a) operations were fully or partially suspended due to a COVID-19-related shut-down order, or (b) gross receipts declined by more than 50 percent when compared to the same quarter in 2019.

An eligible employer means any employer, including an Internal Revenue Code Section 501(c) tax exempt entity, that was carrying on a trade or business during 2020 and either:

1. the employer’s operations were fully or partially suspended during a calendar quarter due to governmental orders related to COVID-19, or

2. the calendar quarter is within a period of significant decline in gross receipts (gross receipts are calculated using the gross receipts test under IRC Section 448(c)).

What are "qualified wages" under the Employee Retention Credit?

As explained by the IRS Employee Retention Credit FAQs, qualified wages are wages (as defined in Section 3121(a) of the Internal Revenue Code) and compensation (as defined in IRC Section 3231(e)) paid by an eligible employer to employees after March 12, 2020 and before January 1, 2021. Under the Act, qualified wages include the eligible employer's qualified health plan expenses that are properly allocable to the wages.

The calculation of the amount of qualified wages depends, in part, on the average number of full-time employees (as defined in Section 4980H of the Code) employed by the eligible employer during 2019.

If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (a) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (b) a significant decline in gross receipts. Qualified wages may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (a) and (b) above.

The meaning of qualified wages depends upon the size of the eligible employer.

• Qualified wages for an eligible employer who averages 100 full-time employees or less are any wages paid to employees during the period between March 12, 2020, and January 1, 2021. Thus, for example, wages paid to furloughed workers, as well as salaries paid to employees working from home, are qualified wages.

• Qualified wages for eligible employers who average more than 100 full-time employees are wages paid to employees during the period between March 12, 2020, and January 1, 2021 who are not working. Thus, for example, salaries paid to employees who are working from home are not qualified wages.

The amount of qualified wages is limited to the first $10,000 of compensation per employee, including health benefits.

Full-time status generally means an employee who is employed on average at least 30 hours per week.

Qualified wages may not exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately preceding a government COVID-19 order or period of significant decline in gross receipts.

Qualified wages do not include paid sick leave or paid FMLA leave wages mandated under the Families First Coronavirus Response Act.

What are "qualified health plan expenses"?

Under the Act, qualified health plan expenses are the amounts paid or incurred by the eligible employer to provide and maintain a group health plan.

How is the maximum amount of Employee Retention Credit available to an eligible employer determined?

The credit is equal to 50 percent of the qualified wages (including qualified health plan expenses, as discussed in Q #53) that an eligible employer pays in a calendar quarter. The maximum amount of qualified wages is $10,000 for each employee for each quarter; therefore, the maximum credit is $5,00

How does an organization apply the credit?

The eligible employer applies the credit to the employment taxes payable by the employer in the next calendar quarter.

The IRS provides the following example. If an eligible employer pays $10,000 in qualified wages to employee A in Q2 2020, the Employee Retention Credit is $5,000. This amount may be applied against the share of social security [FICA] taxes for which the eligible employer is liable for all employee wages paid in Q2 2020. Any excess over the employer's share of social security taxes is treated as an overpayment and refunded to the eligible employer after offsetting other tax liabilities on the employment tax return and subject to any other offsets under section 6402(a) of the Code.

How does an eligible employer claim the refundable tax credit for qualified wages?

Eligible employers can report their total qualified wages and their related credits for each quarter on their quarterly employment tax returns (Form 941) beginning with the second quarter of 2020. If the employer's employment tax deposits are not sufficient to cover the credit, then the employer may receive an advance payment from the IRS by submitting a Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers may take an immediate and refundable credit against the employer portion of their Social Security payroll tax equal to 50% of qualified wages.