IRS employee retention credit: Update on eligibility & ‘qualified wages’

Making payroll during the coronavirus pandemic has been challenging for many companies. And there’s good news: The IRS wants to reward your efforts by allowing you to take an employee retention credit on your taxes.

The agency also just expanded its eligibility requirements. New guidance from the IRS will be helpful for employers to determine if they’re now eligible to claim the 2020 employee retention credit, which was implemented by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

In Notice 2021-20, the agency offers updated guidance on important elements of the credit. Particularly, the notice discusses what counts as “qualified wages.”

What counts for employee retention credit

Per the CARES Act, qualified wages are not only wages and compensation paid for employment, as defined by the Internal Revenue Code, but also any amounts employers pay toward a group healthcare plan.

The employee retention credit is 50% of up to $10,000 in qualified wages paid after March 12, 2020, and before Jan. 1, 2021. So that’s a total of $5,000 per employee.

Any employer that had to suspend operations or lost significant revenue during the COVID-19 pandemic is eligible to apply.

And, thanks to additional legislation, employers that received loans from the Paycheck Protection Program (PPP) in 2020 are also now eligible to claim the credit.

However, employers must be careful. Any wages used when applying for PPP loan forgiveness can’t be also used to claim the credit.

In addition, there’s no double dipping on tax credits allowed. That means wages paid for any qualified sick leave or qualified family leave taken in 2020 under the Families First Coronavirus Response Act (FFCRA) can’t be counted toward the FFCRA tax credit and then also toward the employee retention credit.

To claim the employee retention credit, the amount of qualified wages paid must be reported on the appropriate federal tax return – which is Form 941 for most employers.

Employers may have already filed their 2020 Forms 941 without claiming the credit because they didn’t realize they were eligible for it, especially if they received a PPP loan. If this is the case, they can file Form 941-X for any previous quarter to either request a refund or claim an adjustment on taxes paid. Be sure to let your Payroll and Finance team know about this ASAP. That way, you don’t leave money on the table.