Nearly all temporary business closures last year were due to the COVID-19 pandemic. While 43% of businesses closed temporarily, others had to reduce their active employment by 39%.

The CARES Act protects employee retention credit to help businesses and employees who have struggled. What is employee retention credit exactly?

Keep reading to find out.

Employee Retention Credit

The employee retention credit is a refundable tax credit for some employee taxes. This credit is equal to half of the qualified wages an employer pays to employees within a certain timeframe.

Eligible employers receive immediate access to the credit when they reduce employment tax deposits. If these deposits are not enough to cover the retention credit, the employer might get IRS advance payments.

Wages and certain health plan costs can be counted to determine the employee retention credit. Tax-exempt organizations are among the employers who are eligible for the credit if they operate a business or trade and experience the following:

• Partial or full suspension of the operation of their business or trade
• A significant decline in gross receipts

The dates for these experiences will affect the overall situation. Depending on the calendar year, a significant decline in gross receipts begins and ends at a certain time.

Qualified Wages

The credit applies to qualified wages, but what does this term include? Qualified wages first depend on how many employees an eligible employer has.

Qualified wages include the wages of employees and their health care costs. This is the case if an employer averaged more than 100 full-time employees.

Qualified wages are then paid to the employees who aren’t working due to operation suspension or a decline in gross receipts. Employers can only count wages up to the amount the employee would have been paid.

Claiming Employee Retention Credit

Eligible employers have to report their total qualified wages and related health insurance costs to claim their employee retention credit. The wages have to be recorded per quarter on quarterly employment tax returns.

Credit is taken from the share of the employer’s Social Security tax but the excess is refundable if you follow the right procedures.

Employers can receive a corresponding amount of employment taxes that would have been deposited including the following:

• Federal income tax withholding
• Employee’s share of Social Security
• Employee’s share of Medicare taxes
• Employer’s share of Social Security

You can do all of these things without penalty. If you want an advance of the employee retention credit, you can request one by submitting Form 7200.

Find more retention credit information with this employee retention credit faq.

Employee Retention Credit Facts to Know

Employee retention tax credit can help employees who are struggling with the loss of work due to suspended business operations.

Under the CARES Act, many businesses are eligible to receive an employee retention credit. However, the signing of the Infrastructure Investment and Jobs Act impacts this credit.

Retroactively, this Act ends the retention tax credit program for most businesses. To learn more about this topic and others, check out the additional posts on our blog.

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