Let’s discuss the employee retention credit-a payroll tax credit available to businesses in 2020 that are economically hurt by the coronavirus but continue to keep employees on the payroll.
Employers must suffer economic hardship from the COVID-19 pandemic to qualify for the break.
Eligible employers are those who had to close shop or reduce hours because of a governmental order, or whose gross receipts in a quarter have declined by over 50%, compared with the same quarter in 2019. Tax-exempt groups qualify. States and cities do not. Nor do employers who get a loan under the Paycheck Protection Program.
The credit is 50% of up to $10,000 in qualified wages per employee.
So the maximum credit is $5,000 per worker. Qualified wages are wages paid from March 13 through Dec. 31 of this year and depend on the number of employees in 2019. For firms averaging more than 100 employees, qualified wages are wages paid to employees who aren’t providing services. For smaller firms, all wages are qualified. Qualified wages also consist of the firm’s cost of employer-provided health care, including the employer’s cost of health coverage for unpaid, furloughed workers.
Qualified wages do not include wages computed in figuring the new payroll credit for providing mandated paid sick and family leave to workers affected by COVID-19.
The credit offsets the employer’s 6.2% share of Social Security taxes, with the excess refundable. Employers claim credit on Form 941. They can get the breaks quickly by reducing employment tax deposits otherwise owed to IRS by the amount of payroll credits the business qualifies for.
Employment taxes that can be reduced include withheld federal income tax and the employees’ and employer’s shares of Social Security tax and Medicare tax.
Firms can seek advance payment for credits in excess of payroll deposits by filing new Form 7200. Employers can fax the 7200 to IRS at 855-248-0552.
Employers will need to reconcile the payroll tax credits, reduced deposits and any advance payments they got when they file their quarterly Form 941.
The House’s new stimulus bill would greatly enhance the credit.
Among the proposed changes: Increasing the maximum payroll credit to $12,000 per worker per quarter (up from $5,000 per worker per year now). Extending the credit to eligible state and local government employers, and allowing employers that take out PPP loans to qualify for the credit. Although many of the provisions in the House bill are a wish list for Democrats, keep an eye on the employee retention credit easings. They have bipartisan support.