What Is The Employee Retention Tax Credit?
This type of tax credit is based on a refundable tax credit model. The employee retention tax encourages employers to keep their employees on on the payroll.
For each eligible employee, this new employee retention tax credit offers a 50% tax credit for the first $10,000 of compensation, including the employer portion of health benefits.
- Paid sick and family leave are not covered by compensation, as the employer is reimbursed under the Families First Coronavirus Response Act.
- Wages paid after March 12, 2020, but before January 1, 2021, are eligible for the credit
In 2020, private employers, including nonprofits, conducting a trade or business who are eligible will have:
- Experienced partial or complete suspension of operations as a result of COVID-19
- Experienced a decline in gross receipts of more than 50%, (for 2021, employers who experienced a decline of more than 20% will be eligible).
Under 501(c) of the tax code, tax-exempt organizations must have completely or partially suspended all operations.
The tax credit is given to all employers no matter what size their business is with two exceptions:
- The state, local government and other instruments
- Small businesses with loans
Calculation Of Employee Retention Tax Credit
It is quite easy to calculate the tax credit. The entire amount of the tax credit should be 50% of the wages that were paid up to $10,000 per employee. This would be effective for two quarters. The definition of these wages would vary, depending on if the business had more or less than 100 employees in 2019 as follows.
Less than 100 employees - All employees, regardless of whether they provided service or not are eligible.
More than 100 employees - Full-time employees who were employed but not providing service due to either a full or partial shutdown or a reduction in gross receipts are eligible.
In both these cases, the wages would include the cash payment, as well as a portion of the healthcare provided by the employer.
Employer payroll taxes are applied to the refundable credit. A payment method will be devised by the Treasury Department for employers to receive the tax credit in advance.