The Employee Retention Tax Credit Helps Keep Workers Working

Congress is relying in part on tax relief to help boost the U.S. economy dragged down by the coronavirus pandemic. Take, for example, the employee retention tax credit (ERTC), a federal payroll tax break available to businesses economically hurt by the coronavirus crisis but continue to keep employees on the payroll. It was enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Eligible employers

The credit of up to $5,000 per paid employee offsets the employer's 6.2% share of Social Security taxes, with the excess refundable. Eligible employers are those who have had to shut down or reduce hours because of a government order, or whose gross receipts in a quarter have declined by over 50%, compared with the same quarter in 2019. 

Charities and other tax-exempt organizations qualify for the credit. State and local governments, as well as the federal government, do not qualify. Employers that received a loan under the Small Business Administration's Paycheck Protection Program are currently not eligible for the ERTC.

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Amount of the credit

The credit is 50% of up to $10,000 in qualified wages per employee. "Qualified wages" are wages paid from March 13 through Dec. 31, 2020, and depend on the number of employees the business had in 2019. 

For firms averaging more than 100 employees in 2019, qualified wages are wages paid to employees only for the time they did not work. For smaller firms, all wages paid to employees are qualified wages, regardless of whether the employees worked or not. 

Qualified wages also consist of employer-provided health care, including the employer's cost of health coverage for unpaid, furloughed workers.

(Note the IRS initially said the cost of employer health insurance for unpaid, furloughed workers isn't included in qualified wages, but changed that view after getting pressure from congressional taxwriters). 

Qualified wages don't include wages computed in figuring the payroll tax credit for small employers that provide mandated paid sick or family leave to workers affected by the COVID-19 virus.

Claiming the credit

As mentioned above, the ERTC offsets the employer's 6.2% share of Social Security taxes, with the excess refundable. Employers claim the credit on their quarterly Form 941, and they have two ways of quickly taking advantage of the break before they even file the 941. 

First, they can reduce employment tax deposits otherwise owed to the IRS by the amount of the ERTC the business qualifies for. Employment taxes that can be reduced include (1) withheld federal income tax from employee wages, and (2) the employees' and employer's shares of Social Security and Medicare taxes. 

Second, if the credit exceeds employment tax deposits, then employers can seek advance payments for the excess by filing new IRS Form 7200. Employers can fax the form to the IRS at 855-248-0552. When employers file their quarterly Form 941, they will need to reconcile the ERTC with any reduced deposits and/or advance payments they received.

There are lots of rules and complexities involved with the ERTC. The IRS has provided online guidance on this credit in a set of FAQs covering various topics.