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IRS Launches COVID-19 Employee Retention Tax Credit

by Mike Godfrey, Tax-News.com Washington

15 April 2020


On March 31, 2020, the United States Treasury Department and the Internal Revenue Service launched the Employee Retention Credit scheme, designed to encourage businesses to keep employees on their payroll amid the COVID-19 crisis.

Included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed by President Trump on March 27, 2020, the scheme provides a refundable payroll tax credit equal to 50 percent of up to USD10,000 in wages paid by employers to employees during the COVID-19 crisis.

In its release, the IRS clarified how the credit is calculated, which wages qualify for the credit, and how employers can claim the credit, as follows:

The credit is available to all employers regardless of size, including tax-exempt organizations with two exceptions: state and local governments and their instrumentalities, and 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.
  • 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.

Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but 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.

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.

If the employer had more than 100 employees on average in 2019, 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.

TAGS: tax | small business | business | insurance | employees | payroll | tax credits | Internal Revenue Service (IRS) | health care | United States

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