The IRS has introduced a new employee retention tax credit as part of the tax Cuts and Jobs Act. This new credit is designed to encourage employers to retain their employees during the COVID-19 pandemic.
What is the employee retention tax credit?
The employee retention tax credit is a new tax credit available to employers who had to close or suspend their operations due to COVID-19 or experienced a significant decline in revenue. The credit is equal to 50% of qualified wages paid to an employee, up to a maximum of $5,000 per employee.
Who is eligible for the employee retention tax credit?
Employers are eligible for the employee retention tax credit if they meet one of two criteria:
1. The employer was partially or fully suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19, or
2. The employer experienced a significant decline in gross receipts during the calendar quarter.
For the purpose of this credit, a significant decline in gross receipts means that the employer’s gross receipts for a calendar quarter in 2020 were less than 50% of its gross receipts for the same calendar quarter in 2019.
How does the employee retention tax credit work?
Employers can claim the employee retention tax credit on their quarterly employment tax returns. They will need to report the tax credit on Form 941, Employer’s Quarterly Federal tax Return.
The credit is refundable, which means that if the credit exceeds the employer’s payroll tax liability, the employer can receive a refund for the difference.
What are qualified wages for the employee retention tax credit?
Qualified wages are wages and compensation paid to an employee during the period that the employer is eligible for the credit. For employers with more than 100 employees, qualified wages are wages paid to employees who are not providing services due to COVID-19-related shutdowns or declines in business.
For employers with 100 employees or fewer, all employee wages qualify for the credit, regardless of whether the employee is working.
Conclusion
The employee retention tax credit is a new tax credit available to employers who experienced significant financial losses due to the COVID-19 pandemic. This credit can provide a boost to businesses struggling during these challenging times. Employers are encouraged to consult with a tax professional for guidance on how to claim the credit and ensure they are complying with all IRS requirements.