IRS and the Treasury Department have launched a payroll tax credit to put more money in your pocket as a reward for hanging on to your employees: the Employee Retention Credit.
Specifically, you get 50% of up to $10,000 in wages for all businesses financially impacted by COVID-19.
The good news? Almost every employer is eligible – even tax-exempts.
To make sure you and your Payroll department take maximum advantage, here’s what you need to know.
Who’s eligible for the payroll tax credit
Your company can capitalize on this new payroll tax credit this quarter and the following two.
But there’s a little work required: Your company will have to recalculate each quarter to claim it. To make sure you qualify in a given quarter, you must fall into one of these two categories:
Your business must be either partially or fully suspended by government order due to COVID-19 during the calendar quarter.
Your gross receipts must fall below 50% of the comparable quarter from 2019. Note: Once your gross receipts go above 80% of a comparable 2019 quarter, they no longer qualify after the end of that quarter.
Considering that 43 states are now under stay-at-home orders, almost every employer should fit the bill.
The only exceptions? State and local governments (and their “instrumentalities”), as well as small businesses that take small business loans, including a Paycheck Protection Program (PPP) loan .
Calculating your payroll tax credit
Now you’ll need to get Payroll involved to capitalize on this limited-time credit.
Wages your company paid after March 12, 2020 and before Jan. 1, 2021 count. You can also include a portion of the cost of employer-provided health care in your calculations.
Based on 2019 wages and your company size:
- If you had 100 or fewer employees, look at the wages you paid to all employees, regardless of if they worked or not. If your employees worked full time and were paid for full-time work, you still get the credit.
- If you had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who didn’t work during the calendar quarter.
A self-service payroll tax credit
The best news about this tax credit? You can take it immediately.
Your company can simply help itself to this credit by reducing your required payroll tax deposits you’ve withheld from employees’ wages by the amount of the credit.
A note for your Payroll team: Report your company’s total qualified wages and related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter of 2020. (IRS added a note right on the 941 about this.)
Need an advance of the Employee Retention Credit? You can submit Form 7200.