Employee Retention Credit Qualifications

The employee retention credit is a tax credit that was implemented as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is designed to help businesses keep their employees on payroll during the COVID-19 pandemic. If your business has experienced a significant decline in gross receipts or has been fully or partially suspended due to government orders, you may be eligible for this credit. In this article, we will discuss the qualifications for the employee retention credit and how it can benefit your business.
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Qualifications for the Credit

In order to qualify for the employee retention credit, your business must meet certain criteria. These include:

  • The business must have been in operation during the 2020 calendar year.
  • The business must have experienced a significant decline in gross receipts. This means that your gross receipts for any calendar quarter in 2020 must be less than 50% of the gross receipts for the same quarter in 2019.
  • If your business was not in operation for the entire 2019 calendar year, you can compare your gross receipts for any quarter in 2020 to an average of your gross receipts for the first and second quarters of 2020.
  • Your business must have been fully or partially suspended due to government orders. This means that your operations were directly impacted by government-mandated closures or restrictions.

Maximum Credit Amount

If your business meets the qualifications for the employee retention credit, you can receive a credit of up to 50% of qualified wages paid to each employee. The maximum amount of qualified wages that can be applied towards the credit is $10,000 per employee, for a total maximum credit of $5,000 per employee.

Qualified Wages

Qualified wages are the wages that you pay to your employees during the time period when your business is experiencing a significant decline in gross receipts or is fully or partially suspended due to government orders. The amount of qualified wages that can be applied towards the credit varies depending on the number of employees you have.

  • If your business had an average of 100 or fewer full-time employees in 2019, all wages paid to employees during the time period can be considered qualified wages.
  • If your business had more than 100 full-time employees in 2019, only the wages paid to employees who were not providing services during the time period can be considered qualified wages. This means that if you continued to pay employees who were working remotely or on reduced hours, those wages would not be eligible for the credit.

Claiming the Credit

The employee retention credit can be claimed on your quarterly employment tax returns, Form 941. If the amount of the credit exceeds the amount of employment taxes that you owe, you can request an advance payment of the credit by filing Form 7200.

Additional Considerations

It is important to note that if your business received a Paycheck Protection Program (PPP) loan, you are not eligible for the employee retention credit. However, if you repaid your PPP loan by May 18, 2020, you may still be eligible for the credit. Additionally, you cannot claim the credit for any employee who is also included in the Work Opportunity Tax Credit or for any wages that are already receiving a credit for paid sick or family leave under the Families First Coronavirus Response Act.

In Conclusion

The employee retention credit can provide much-needed relief to businesses struggling during the COVID-19 pandemic. If your business meets the qualifications for the credit, it can help you keep your employees on payroll, even during difficult times. Be sure to consult with a tax professional to determine eligibility and how to properly claim the credit on your employment tax returns.