How to Qualify for the Employee Retention Tax Credit

The CARES Act created an employee retention tax credit, which is designed to assist eligible employers with keeping employees on their payroll, while experiencing economic hardship and closures as a result of COVID-19. The employee retention credit is a fully refundable tax credit equal to 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. This tax credit applies to qualified wages paid after March 12, 2020, and before Jan. 1, 2021. The maximum credit for qualified wages paid to any employee is $5,000. Employers that qualify are those that continue business during calendar year 2020, including a tax-exempt organization or non-profit, and either:

1. Fully or partially suspend operation during any calendar quarter in 2020 due to orders from a governmental authority limiting commerce, travel or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or

2. Experience a significant decline in gross receipts during the calendar quarter.

Does my business qualify to receive the Employee Retention Credit?

The credit is available to all employers, even if you only have 1 employee, including tax-exempt organizations. There are two exceptions:

1) state and local governments and their instrumentalities; and

2) small businesses who take small business loans (SBA’s or EIDLS).

To be a qualifying employer, you must fall into one of the following 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% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
  • These measures are to be calculated each calendar quarter.

How do I calculate the credit?

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, will be 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 for the 2019 year or over a 180 day review period from Feb 15,2020 looking back.

I am an eligible employer. How do I get my credit?

We have been advised that 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 Form 941 (quarterly employment tax returns), beginning with Q2 of 2020. 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.

If you are with ManagedPAY’s payroll dept. we will assist you with these forms.

For more information

For continued updates on the Employee Retention Credit, Frequently Asked Questions on Tax Credits for Required Paid Leave  and any other information can be found on the Coronavirus page of IRS.gov.