The IRS has posted a summary description of the employee retention tax credit that was enacted as part of the CARES Act (available here). The IRS also posted a frequently asked question page regarding the credit (available here).
The employee retention credit is a credit against the employer portion of social security tax and generally is available to employers that either (a) fully or partially suspended operations during any calendar quarter in 2020 due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or (b) experience a significant decline in gross receipts during a calendar quarter. For this purpose, an employer experiences a significant decline in gross receipts during a calendar quarter if the employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019.
The amount of the employee retention credit is equal to 50 percent of an employer’s qualified wages paid to each employee per quarter, up to a maximum amount of $10,000 of qualified wages per employee for the year.
The FAQs include two helpful examples describing the calculation of the employee retention. In the first example, an eligible employer pays $10,000 in qualified wages to an employee in the second quarter of 2020. The amount of the credit with respect to such wages is $5,000 (50 percent of $10,000).
In the second example, an eligible employer pays $8,000 in qualified wages to an employee in the second quarter of 2020 and $8,000 in qualified wages to the employee in the third quarter of 2020. The amount of the credit with respect to such wages $4,000 in the second quarter (50 percent of $8,000) and $1,000 in the third quarter due to the overall limit on qualified wages per employee of $10,000, which limits the maximum amount of the credit per employee to $5,000 (50 percent of $10,000) for the year.
Click here to continue reading highlights of the IRS FAQ page regarding the employee retention tax credit.