The federal government and the Internal Revenue Service are offering U.S. businesses coronavirus tax relief through the Employee Retention Credit, which provides businesses that retained employees during the pandemic an opportunity to claim a tax credit. The credit is fully refundable for employers equal to 50 percent of qualified wages—including allocable qualified health plan expenses—that eligible employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make.

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. Because the credit can apply to wages already paid after March 12, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit.

The Internal Revenue Service defines eligible employers, for the purposes of the Employee Retention Credit, as 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—for commercial, social, religious or other purposes—due to COVID-19; or experience a significant decline in gross receipts during the calendar quarter.

To claim the Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns—form 941 for most employers—beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures. In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty.

For more information on the credit, accounting and business consulting firm Armanino has prepared a webinar that provides an overview of the program. Click here for more information.