On March 31, 2020, the IRS released an FAQ document that helps answer questions about the Employee Retention Credit that both employers and employees will find helpful. This FAQ offers definitions of some key terms in the legislation, examples on how those terms apply to some common scenarios, and provides guidance on how employers can claim the credit.
The Employee Retention Credit is a tax credit created with the March 27, 2020 enactment of the CARES Act. The basic purpose is to give employers a refundable tax credit that equals 50% of the qualified wages they pay to employees after March 12, 2020, and before Jan. 1, 2021. The maximum wage amount that can be included is capped at $10,000 per employee, which makes the claimable credit maximum $5,000 per employee. Please also consider that any wages included as qualified sick or family leave wages when claiming a credit under the Families First Coronavirus Relief Act cannot be included in the Employee Retention Credit.
To claim the credit, employers need to be ‘eligible employers’ which generally means they must be experiencing economic hardship because of either a full or partial suspension of operations due to COVID-19, or a significant decrease in gross receipts. The FAQ gives examples of situations that would qualify an employer under those classifications, highlighting the type of closures and decline in gross receipts that are applicable. The FAQ also clarifies an important distinction about employers with 100 or fewer employees, so that they can include employee wages in their credit calculation regardless of whether the employee was working during the economic hardships described above.
The FAQ also addresses the general process of claiming the credit on their quarterly employment tax return through Form 941 or similar, how to use the credit to fund their qualified wages prior to claiming the credit, how to avoid penalties for underpayment, the process for claiming an advanced refund and the interplay between the Employee Retention Credit and the FFCRA and Small Business interruption Loans under the Paycheck Protection Program.