Does My Business Qualify for the Employee Retention Credit?

What is the Employee Retention Credit?

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50 percent of qualified wages that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.

The Cares Act Provides Pertinent Guidance

Section 2301 of the CARES Act allows a credit (employee retention credit or credit) against applicable employment taxes for eligible employers, including tax-exempt organizations, that pay qualified wages, including certain health plan expenses, to some or all employees after March 12, 2020, and before January 1, 2021. Section 206 of the Relief Act adopts amendments and technical changes to section 2301 of the CARES Act for qualified wages paid after March 12, 2020, and before January 1, 2021, primarily
relating to who may claim the credit. Section 207 of the Relief Act amends section 2301 of the CARES Act to extend the application of the employee retention credit to qualified wages paid after December 31, 2020, and before July 1, 2021, and to modify the calculation of the credit amount for qualified wages paid during that time.

Who is an Eligible Employer for the Employee Retention Credit?

Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

• Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
• Experience a significant decline in gross receipts during the calendar quarter.

An important note is that self-employed individuals are not eligible for this credit for their own self-employment earnings, though they may be able to claim the credit for wages paid to their employees.

For more information, see Determining Which Employers are Eligible to Claim the Employee Retention Credit.

What is a “significant decline in gross receipts”?

An important factor in determining whether your business qualifies for the employee retention credit is whether there was a significant decline in gross receipts. A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.

For more information, see Determining When an Employer is Considered to have a Significant Decline in Gross Receipts.

What are “qualified wages”?

Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in section 3231(e) of the Code) paid by an Eligible Employer to some or all employees after March 12, 2020, and before January 1, 2021.  Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.

The definition of qualified wages depends, in part, on the average number of full-time employees employed by the Eligible Employer during 2019.

If the Eligible Employer averaged more than 100 full-time employees in 2019 the following rule applies. Qualified wages are the wages paid to an employee for time that the employee is not providing services due to an economic hardship; specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.  For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship described in (1) or (2) above. 

If the Eligible Employer averaged 100 or fewer full-time employees in 2019, the following rule applies. Qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

For more information, see Determining Qualified Wages.

Conclusion

If you have questions about the Employee Retention Credit, contact a tax attorney to discuss your questions. The attorneys at Disparte Tax Law are available to assist you with your tax needs. IRS tax liability issues also can impact EDD tax issues as well.