Employee retention credit comes with fewer strings

Getting a Paycheck Protection Program loan was fraught, limited to employers with fewer than 500 employees, and only covered eight weeks of payroll and expenses. The employee retention credit, on the other hand, comes with fewer strings and is easier to claim, since you account for it on your 941.

However, the retention credit is no walk in the park, either.

The IRS has issued a series of FAQs on the retention credit and says more guidance is in the pipeline. But remember, you can’t rely on the FAQs as a legal authority if the IRS later audits you.

What’s it worth?

For wages paid after March 12, 2020, through the end of the year, only employers that were subject to an official government order to partially or completely shut down, and can’t continue to operate, say, by having employees telecommute, but that continued to pay and provide health benefits to employees, qualify for a refundable tax credit against their share of Social Security taxes. Maximum credit per employee: $5,000.

The FAQs stress that statements from a mayor or other governmental official, including comments made during press conferences or in interviews with the media, aren’t governmental orders. Neither is staying closed because you determine it’s not worth it to open.

All employers qualify for the retention credit, but who gets paid creditable wages differs, depending on size:

  • For employers with more than 100 full-time employees during 2019, qualified wages are wages paid to employees who aren’t working because a government order suspends your business operations or you experience a significant decline in gross receipts. No raises: Only the amounts paid to employees for time they’re not working, and at the rate of pay in effect prior to the increase, count as qualified wages.
  • For employees with 100 or fewer full-time employees during 2019, qualified wages are wages paid to all employees, regardless of whether they were furloughed, because a government order suspends your business or you experience a significant decline in gross receipts.

The credit provides maximum flexibility. So you can skip the credit for the second quarter and claim it for the third. Or you can claim it retroactively to the second quarter by filing Form 941-X for the second quarter and making an interest-free adjustment.

Heads up: Don’t use your third-quarter 941 to claim the credit for wages paid in the second quarter.

Corporate tax impacts

The retention credit is one of several payroll credits you can take. You can take all the credits to which you are entitled, but you can’t take them against the same wages. If, for example, you take the corporate credit for providing paid sick leave, you can’t also take the retention credit for the same wages paid to the same employee.

You can, however, take the credits consecutively. So when you max out on the corporate credit for paid sick leave, you can begin to take the retention credit.

You deduct the wages and benefits you provide to employees on Form 1120 as ordinary and necessary business expenses. If you take the credit and deduct the wages and benefits, you’ve double-dipped. Accordingly, your aggregate deductions are reduced by the amount of the credit.

However, neither the portion of the credit that reduces your share of Social Security taxes nor the refundable portion of the credit, is included in your company’s gross income.