The employee retention tax credit is a refundable tax credit by an eligible firm between March 12, 2020, and before January 1, 2021, that wants to retain its staff on the payroll. The credit is 50% of up to $10,000 in wages paid by an employer whose company is completely or partially halted as a result of COVID-19, or those whose gross receipts have decreased by more than 50%. Employers who are qualified for the credit can get it right away by decreasing the amount of employment tax deposits they are needed to make.
Employers, especially tax-exempt organizations, are eligible for the credit if they run a trade or company in 2020 and experience one of the following:
- a complete or partial cessation of their trade or activity during any calendar quarter as a result of governmental directives restricting commerce, travel, or group meetings as a result of COVID-19, or
- a significant drop in gross receipts.
Availability of the Credit
Employers regardless of the size, notably including tax-exempt organizations, are eligible for the employee retention tax credit benefit. However, 2 exceptions apply for the availability of the credit:
- state and local governments and their agencies, and
- small enterprises that take out Small Business Loans.
To be eligible, the employer must fulfill one of two alternative tests. Each calendar quarterly, these tests are computed:
- if the employer’s business is totally or partially halted by government mandate pursuant to COVID-19 during that calendar quarter, or
- if the employer’s gross receipts are less than 50% of the same quarter in 2019. After the end of a comparable quarter in 2019, if the employer’s gross receipts exceed 80%, they are no longer eligible.
Impact of other reliefs or credits:
Other credits and relief laws affect a qualified employer’s right to claim the employee retention tax credit and some of which are:
- Employers who obtain a Small Business Interruption Loan through the CARES Act-authorized Paycheck Protection Program shall not be eligible for the tax credit.
- Wages used to calculate this credit cannot be used to calculate the credit for paid family and medical leave under Internal Revenue Code section 45S.
- Wages for this tax credit are not inclusive of wages in which the employer earned a tax credit there under the Families First Coronavirus Response Act for the reason of paid sick and family leave.
- If the employer is eligible for a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code, the employees are not considered for this credit.
What is the procedure for obtaining credit?
The small company Employee Retention Credit allows companies to deduct 70% of an employee’s qualified pay up to $10,000 every quarter. The maximum credit amount per employee is $7000 per quarter. The employer’s Social Security tax burden is reduced by the credit. A refund from the IRS is received if the credit exceeds one’s Social Security tax liability.
Employers can receive immediate reimbursement for the credit by lowering the amount of payroll taxes deducted from employees’ salaries and deposited with the Treasury. In December 2020, the Employee Retention Credit was further extended by the Consolidated Appropriations Act (CAA or the Act). All employees don’t need to take advantage of the tax credit and employers who are eligible for the Employee Retention Credit may choose not to claim it.