By: The Center for Financial, Legal & Tax Planning
Employers should pay close attention to their eligibility with regards to the Employee Retention Credit. Eligible employers can claim the credit for wages paid between March 12, 2020 and January 1, 2021. Most importantly, the credit is fully refundable.
The Employee Retention Credit is a fully refundable tax credit 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. The maximum amount of qualified wages considered 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.
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: 1) 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 2) experience a significant decline in gross receipts during the calendar quarter. Governmental employers and self-employed individuals are not Eligible Employers. However, self-employed business owners may be able to claim the credit for wages paid to their employees.
The credit is fully refundable because the Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes the Eligible Employer owes. That is, if for any calendar quarter the amount of the credit the Eligible Employer is entitled to exceeds the employer’s share of the social security tax on all wages (or on all compensation for employers subject to RRTA) paid to all employees, then the excess is treated as an overpayment and refunded to the employer under sections 6402(a) and 6413(a) of the Internal Revenue Code (the “Code”).
The employee retention credit is a great incentive for small business owners. By keeping people employed instead of laying them off, business owners can claim this credit to recover a portion paid in wages.
