As one of the programs outlined in CARES, the Employee Retention Tax Credit helps to keep employees on payroll by providing tax credits up to $5,000 per eligible employee. This tax credit applies to qualified wages paid between March 13, 2020 and December 31, 2020. To opt in, companies must have experienced either (i) a complete or partial closure due to government orders limiting commerce, travel, or group meetings as a result of COVID-19or (ii) a significant decline (at least 50%) in gross receipts. The scope of employee eligibility varies depending on company size. Businesses cannot opt into this program if they participate in the Paycheck Protection Program. The credit is 50% of up to $10,000 in qualified wages paid to an employee between March 13, 2020 through December 31, 2020.
- The employee retention tax credit cannot be combined with a Paycheck Protection Program (PPP) loan.
- To claim this tax credit you must meet at least 1 of the 2 eligibility criteria, listed below.
Who is eligible?
Your company must meet at least one of the following criteria to participate:
- You fully or partially suspend operation during any calendar quarter in 2020 due to government orders limiting commerce, travel, or group meetings as a result of COVID-19.
- You experience at least a 50% decline in gross receipts during the calendar quarter compared to the same quarter the previous year. If gross receipts later increase, eligibility ends in the first quarter that gross receipts are greater than 80% compared to the same quarter the previous year.
Additionally, companies that receive a PPP are not eligible to participate.
Note that if your company has related entities, you may have to include those entities when you consider your company’s eligibility, including whether a related entity has received a PPP loan. For more information, see the FAQs section below.
For companies that averaged 100 or fewer full-time employees in 2019, this tax credit can be claimed for all your employees provided that your company meets the eligibility requirements. Again, if your company has related entities, you may have to include employees of related entities when counting employees.
For companies that averaged 101 or more full-time employees in 2019, this tax credit can only be claimed for wages paid to employees who are not performing services due to (i) the employer’s complete or partial closure by governmental authority due to COVID-19 or (ii) significant decline in gross receipts. These companies can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. We’re still working on supporting the employee retention tax credit opt-in for these companies. We will reach out when you can claim the credit in Justworks.
How does it work?
You can claim this tax credit at any point in a quarter, for qualified past or future wages from that quarter. You’ll also choose the future quarters for which you’d like to claim this tax credit. Q2 is the only quarter that will allow the tax credit for Q1 wages (on or after March 13, 2020) to be claimed in Q2 invoices. If you start your tax credit in either Q3 and Q4, retroactive tax credits can only be claimed from the beginning of that quarter.
This a one-time opt-in. However, since eligibility may change from quarter to quarter, it’s your responsibility to reach out to Justworks to disable your tax credit if you become ineligible at any point in 2020. If you do not, you may be subject to tax penalties.
It’s your responsibility to maintain records sufficient to substantiate eligibility for the Employee Retention Tax Credit.
How do I enroll?
From the COVID-19 relief page, you can navigate to the Employee Retention Tax Credit opt-in page. Here, we’ll ask if you’d like to enable the tax credit.
Companies with 100 or fewer full-time employees
For companies that averaged 100 or fewer full-time employees in 2019, this credit will apply for ALL employees provided that your company meets the eligibility requirements.
When you get started, we’ll ask you a few questions:
- Have you received or intend to receive a PPP loan?
- If yes, you’re unable to also participate in the Employee Retention Tax Credit program
- Have you requested the employee retention tax credit for past wages?
- If yes, you will be able to continue once you have filled out Justworks;’ COVID-19 tax credit record form
- Tell us the average size of your company in 2019
- If you averaged above 100 employees in 2019, you will not be able to proceed at this time.
- Tell us the reason you’re claiming the tax credit
- Suspended operations
- Decline in gross receipts
- Both A and B
- What quarters do you want to apply for credits for?
- Claim tax credit for future wages only (today–Dec 31, 2020)
- Claim tax credit for all past and future wages starting from Q1 (Mar 13, 2020–Dec 31, 2020)
- Claim tax credit for all past and future wages starting from Q2 (April 1, 2020–Dec 31, 2020)
Justworks uses the payment processing date to determine past and future wages.
If you already claimed this tax credit for any past wages, Justworks will not be able to take action on your behalf at this time.
Credits for Q1 wages will be applied to Q2 invoices.
Finally, you will need to agree to each of the applicable terms and conditions by checking the adjacent box and then clicking “Claim Employee Tax Retention Credit.”
Companies with 101 or more full-time employees
For companies that averaged more than 100 full-time employees in 2019, Justworks cannot claim Employee Retention Tax Credits on your behalf
Any Employee Retention Tax Credit you’d like to claim must be processed directly with the IRS through the Form 7200. Below are instructions on how to calculate credits for your claim with the IRS. We’ll also provide the same instructions after selecting “I understand & Submit” in the app. We also recommend reviewing the IRS guidance and consulting with your tax advisor before using this tool.
How to calculate the amount of the CARES tax credit for the Form 7200.
- Identify which employees are impacted by COVID-19 and the percent of their wages that are eligible for a credit (more information on how to do this below).
- Determine the amount of tax credits you can claim for each employee impacted by COVID-19. As a reminder, there’s a cap of $5k/employee.
Credit = (wages + applicable health expenses**) x percent of eligible wages x .5
- Add the total credits together and fill out the Form 7200 and directly file it with the IRS.
- Return to Justworks and report the amount of payroll tax credits you claimed with your Form 7200. We need this info so we can correctly file your taxes and track the program’s tax credit caps for each employee.
Identify which employees are impacted by COVID-19.
For employers that averaged more than 100 employees in 2019, you can only claim Employee Retention Tax Credits for wages paid to employees for time in which they did not actually perform services and the reason they did not provide services was due to (i) the employer’s complete or partial closure by governmental authority due to COVID-19 or (ii) at least a 50% decline in gross receipts.
The percent of their wages that are eligible for a credit is equal to the percent of time for which they were paid, but did not perform services due to the reasons outlined above. For example, if an employee was paid for 40 hours, but only performed 20 hours of services, the percent of eligible wages is 50%. Additional considerations apply, so be sure to review the IRS FAQs on determining qualified wages.
How to calculate applicable health expenses?
This can be determined by the following:
- Total monthly amount:
- Take the total monthly health premium (this can be found in the benefits center) for an EE. Make sure to include all of MDV if applicable.
- If applicable, the FSA amount divided by 12.
- In this example, let’s say health premium is 800 (all of MDV costs) and 300 FSA. So the monthly premium is $1,100.
- Calculate the daily rate for the month. Take the monthly premium and divide by the number of working days in the month. For example, June has 22 working days. So the daily rate is $50.
- Multiply daily rate by the number of working days in the period for the health care costs for the period: daily rate*(number of working days in the pay period) = applicable health expenses. Let’s say this is a semimonthly pay period with 12 work days. $50*12=$600 applicable health expenses for the period.
Special case: If the pay period spans two months, you need to take the health premium and do two equations. Daily rate month 1*(number of working days in month 1 in the pay period) (daily rate month 2)*(number of working days in month 2 in the pay period)=applicable health expenses for the period.
May monthly premium $1,200
Working days in May: 20
Working days in May during the pay period: 5
June monthly premium $1,100
Working days in June: 22
Working days in June during the pay period: 5
Total for pay period=$550
How does this work with FFCRA?
If you have employees on FFCRA leave and also opt into the employee retention tax credit, Justworks will make sure you’re not being credited for the same wages to avoid tax penalties. If you added an employer contribution to FFCRA leave, that amount will be eligible for a tax credit. For more info, visit the IRS’ FAQs on the employee retention tax credit.
How does this work with related entities?
Note that under IRS guidance, certain related entities may be considered a single employer for retention tax credit eligibility questions, including whether an employer meets the economic conditions set forth above, has received a PPP loan, or is under the applicable average employee thresholds. Visit the IRS FAQS for specific guidelines around aggregation rules and determining employer eligibility.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.