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Intuit

How to set up and track the Employee Retention Credit

Learn how to pay your employees when your business is closed due to COVID-19.

With QuickBooks and Intuit Online Payroll, you can ensure your employees get paid if you have to close and if you are eligible for the provisions found under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Consolidated Appropriations Act, and the American Rescue Plan Act of 2021.

Update: With the passage of the Consolidated Appropriations Act and American Rescue Plan Act of 2021, the Employee Retention Credit has been extended to December 31, 2021. The Qualified Wages for the credit was changed to 70% of up to $10,000 per quarter through December 31, 2021.

The definition of a large employer also was updated to employers that had more than 500 employees on average in 2019 (it was originally more than 100 employees on average in 2019).Additionally, beginning June 30, 2021 a feature was added for new businesses that have been operating after February 15, 2020.

941 Filing: We're waiting for more info from the IRS, so check back here soon to learn how the 941 is affected by the updated Employee Retention Credit.

What's the Employee Retention Credit?An eligible employer may be able to offset the impact of COVID-19 with an Employee Retention Credit. Generally, this allows an employer to get a refundable tax credit for up to 70% of the qualified wages paid to employees during the closure up to a maximum of $10,000 wages per employee, which amounts to $7,000 in credits, per employee.

Before you can take an employee retention credit, you need to do a few things. Here's what to do:

Make sure you qualify for the credit

Before you can set up the Employee Retention Credit in your payroll, you need to make sure you qualify for the credit. The size of your workforce, the structure of your business, and the reason why your business may or may not be closed all affect whether you can take this credit.

Note: If you have any questions about the CARES Act, the Consolidated Appropriations Act, the American Rescue Plan Act of 2021, or deferring the employer portion of social security, please talk with your accountant or accounting professional.

Set up your payroll to accept and track the credit

Once you've determined you are eligible to accept the credit, you need to first set up your payroll to accept and track the credit. Since the Employee Retention Tax Credit covers regular time, overtime, and company contributions to health care, you’ll need to set each of these items in your payroll, and then run payroll.

If you need to add the Employee Retention Tax Credit to prior paychecks or correct prior tax filings:

  • QuickBooks Desktop Payroll Basic or Enhanced: you can make the corrections yourself in your QuickBooks Desktop file.
  • All other products contact us to make the corrections.

Select your payroll service to get started:

Note: Not sure which payroll service you have? Here's how to find which payroll service you have.

Step 1: Set up your employees with the pay types

  1. Go to Payroll menu,then select Employee.
  2. Select the employee you’d like to add paid leave to.
  3. In the How much do I pay an employee section, select the edit icon to add more pay types.
  4. Under the CARES Act section, select the pay types that apply to you: CARES Act Regular and CARES Act Overtime.
  5. If applicable, select and enter any Employer Paid Health Insurance Premium amount to be tracked on each check.
  6. Select Done.

Step 2: Run your payroll using the pay types

  1. Select on Run Payroll from the Overview screen.
  2. If you have multiple pay schedules select the schedule you are paying.
  3. Enter hours in the corresponding fields:
    • For regular hours in the Employee Retention Credit Regular.
    • For any overtime hours in the Employee Retention Credit Overtime.
    • If applicable, enter in the Employer Health Insurance Premium.
    • If your employee is salaried, select the salary amount shown to reduce the hours by the number of hours you are paying your employee with the Employee Retention pay items.
    • If your employee is commission only, you will need to convert their pay to an hourly rate.
  4. Enter any other items you need to include.
  5. Select Preview Payroll.
  6. Review the paychecks, and then select Submit Payroll.

After you have run payroll, the resulting tax credit will appear on your tax payments. Go to Taxes then select Payroll Tax to view your payments.

Step 1: Set up your employees with the pay types

  1. Go to Employees.
  2. Select the employee you’d like to add the CARES Act pay types to.
  3. In the Pay section of the Employee Overview screen, select the Edit button
  4. In the What additional ways do you pay your Employee section, under the CARES Act section, select the pay types that apply to you: either the CARES Act Regular or CARES Act Overtime.
  5. If applicable, select and enter any Employer Paid Health Insurance Premium amount to be tracked on each check.
  6. Select OK.

Step 2: Run your payroll using the pay types

  1. Select the Payday tab.
  2. If you have multiple pay schedules, select the schedule you are paying.
  3. Enter hours in the corresponding fields.
    • For regular hours in the Employee Retention Credit Regular.
    • For any overtime hours in the Employee Retention Credit Overtime.
    • If applicable, enter in the Employer Health Insurance Premium.
    • If your employee is salaried you will need to reduce the hours of salary. To do this, add the new pay item hours and select preview. After selecting Create Paychecks, edit the checks to reduce the salary hours.
    • If your employee is commission only, you will need to convert their pay to an hourly rate.
  4. Enter any other items you need to include.
  5. Select Create Paychecks.
  6. Review the paychecks, and then select Approve Paychecks.

After you have run payroll, the resulting tax credit will appear on your tax payments. Go to Taxes then select Payroll Tax to view your payments.

Step 1: Set up your employees with the pay types

  1. Go to Employees.
  2. Select the employee you'd like to add the CARES Act pay types to.
  3. In the Pay section of the Employee Overview screen, select the Edit button
  4. In the What additional ways do you pay your Employee section, under the CARES Act section, select the pay types that apply to you: either the CARES Act Regular or CARES Act Overtime.
  5. If applicable, select and enter any Employer Paid Health Insurance Premium amount to be tracked on each check.
  6. Select OK.

Step 2: Run your payroll using the pay types

  1. Select the Payday tab.
  2. If you have multiple pay schedules, select the schedule you are paying.
  3. Enter hours in the corresponding fields.
    • For regular hours in the Employee Retention Credit Regular.
    • For any overtime hours in the Employee Retention Credit Overtime.
    • If applicable, enter in the Employer Health Insurance Premium.
    • If your employee is salaried you will need to reduce the hours of salary. To do this, add the new pay item hours and select preview. After selecting Create Paychecks, edit the checks to reduce the salary hours.
    • If your employee is commission only, you will need to convert their pay to an hourly rate.
  4. Enter any other items you need to include.
  5. Select Create Paychecks.
  6. Review the paychecks, and then select Approve Paychecks.

After you have run payroll, the resulting tax credit will appear on your tax payments. Go to Taxes then select Payroll Tax to view your payments.

Step 1: Set up your expense accounts for the retention credit

Once you determine your eligibility, you’ll need to set up your expense account to be able to help track the eligible wages to use towards tax credit until the December 31, 2021 expiration.

  1. Go to the Lists menu, then select Chart of Accounts.
  2. Select the Account ▼ dropdown, then select New.
  3. Choose Expense, then select Continue.
  4. From the Other Account Type ▼ dropdown, select Other Expense.
  5. Give your expense account a name, such as CARES Expense, in the Name field, fill out all the relevant information, and select Save and Close.

Step 2: Set up the 3 payroll items

Once you’ve set up your QuickBooks to accept the retention credit, you now need to set up each credit.

  1. Go to the Employees menu, then Manage Payroll Items, then select New Payroll Item.
  2. Select Custom Setup, then select Next.
  3. Select Addition, then select Next.
  4. Give your pay type a name, such as CARES Retention Emp, in the text field and select Next.
  5. Select CARES Expense (or whatever you named the expense account in Step 1) as the expense account, then Next.
  6. In the Tax Tracking type window, Select CARES Retention Cr.-Emp, then Next.
  7. In the Taxes window, select Next.
  8. In the Calculate Based on Quantity window, select Calculate Based on Quantity , and select Next.
  9. In the Default Rate and Limit window, leave the default rate at zero (rates will be assigned at the employee level. For the default limit, review the scenarios below.
    • Scenario 1: If no employee will exceed $10,000 in wages per quarter, leave the default limit blank then select Finish.
    • Scenario 2: If one or more employees will exceed $10,000 per quarter and they are paid on a regular pay schedule (no one month in a quarter will be higher in pay than another month, enter 3333.33 as the default limit. Select the Limit Type dropdown, and choose Monthly – Restart each month then select Finish. (Note: We suggest reviewing the totals for each employee prior to the last payroll of each quarter to ensure you are obtaining the full benefit of the credit using this scenario. Limits can be updated on individual employees to account for one time need to hit the exact $10k,000 wage limit for the quarter.)
    • Scenario 3: If one or more employees will exceed 10,000 per quarter and their pay fluctuates greatly from one month to another, leave the default limit fields blank then select Finish. The quarterly limit will need to be tracked manually. QuickBooks will not stop calculating the Addition item automatically and care must be taken to not exceed $10,000 in wages per quarter applied to this item.
  1. Go to the Employees menu, then Manage Payroll Items, then select New Payroll Item.
  2. Select Custom Setup, then select Next.
  3. Select Company Contribution, then select Next.
  4. Give your company contribution a name, such as CARES Retention - Health credit, and select Next.
  5. On the Agency for company-paid liability screen, select Cares Expense from the Liability account ▼ dropdown, and select CARES Expense (or whatever you named the Expense account, from step 2) from the Expense account ▼ dropdown, and then select Next.
  6. On the pop message to confirm you selected the same account, select Yes. Selecting the same account for Liability and Expense accounts ensures your liabilities are not overstated.
  7. On the Tax tracking type window, choose CARES Retention Cr.- Health, then select Next.
  8. On the Taxes window, select Next.
  9. In the Calculate Based on Quantity window, select Neither, and select Next.
  10. In the Default Rate and Limit window, select Finish.

Note: If you have QuickBooks Desktop Payroll Enhanced, you will need to run a Quick Report to view total amounts. The limit of the credit you can receive is 70% of wages up to $10,000 wages, including employer health care from April 1, 2020 - March 31, 2021 and $12,000 from April 1, 2021 - September 30, 2021, per employee for all calendar quarters.

Example: Eligible Employer pays Employee B $8,000 in qualified wages in Q1 2021 and $11,000 in qualified wages in Q2 2021. The credit available to the Eligible Employer for the qualified wages paid to Employee B is equal to $5,600 in Q1 and $7,000 in Q2 due to the quarterly limit of $10,000 on qualified wages (or a $7,000 limit on the tax credit) per employee, per quarter.

  1. Go to the Employees menu, then Manage Payroll Items, then select New Payroll Item.
  2. Select Custom Setup, then select Next.
  3. On the Payroll item type window, select Other Tax, then select Next.
  4. On the Other tax window, select CARES Retention Credit, and then Next.
  5. In the Name used in paychecks and payroll report window, enter CARES Retention Credit in the text field, then select Next.
  6. In the Agency for company-paid liability window, select the agency you pay taxes to from the ▼ dropdown, select Cares Expense (or whatever you named the expense account) from both the Liability account ▼ dropdown, and the Expense account ▼ dropdown, and select Next.
  7. From the Taxable Compensation Window, select Finish.

Step 3: Run a regular payroll

  1. Select Employees, then Pay Employees
  2. (Skip to step 3 if you need to run an unscheduled payroll) Select the appropriate schedule in the Create Paychecks section, and select Start schedule Payroll.
  3. Verify the Pay Period Ends date, Check Date, and Bank Account the money is drawn from.
  4. Place a checkmark next to the employee and select Open Paycheck Detail.
  5. Under Earnings remove the amount listed under Rate. Under Other Payroll Items, in the Item Name ▼ dropdown select CARES Retention Credit - Emp. or the name used during setup. Enter the employee’s hour rate and quantity of hours.
    • Check: In the Employee Summary you should see “Regular” wages (salary or hourly) set to 0, with wages listed under the name entered for the credit during setup.
  6. Select Save Next to go to the next employee, or select Save Close to go back to the Enter Payroll Information window.
  7. When the checks are ready to be created, select Continue.
  8. Review the Check/Direct Deposit printing options.
  9. Verify the amounts for each employee, and select Create Paychecks.
  10. Print paychecks and print pay stubs now or later if desired.

Step 4: Pay liabilities

Note: QuickBooks Desktop Payroll Assisted customers will have their credits adjusted automatically when they send payroll.
  1. Go to the Employees menu, then select Payroll Center.
  2. Select the Pay Liabilities tab.
  3. In the Pay Taxes & Other Liabilities section, mark the Federal 941 and other liabilities, make sure the check amount and item list under Payroll Liabilities are accurate, and then select View/Pay.
  4. Go to the Payroll Liabilities ▼ dropdown and enter the CARES Act Retention Credit and the amount of the 941 tax liabilities you qualify for based on the Quick Report of (Expense account name from step 2) you created. You’ll need to enter the amount of the credit as a negative amount.
    • If the liability is less than the available credit, the credit can rollover to future payroll or you can apply for a refund via the Form 7200, check the IRS website for more information. Select Recalculate to update check.
  5. Select To be printed if you want to print the check. If you used a handwritten check, enter the check number or other reference in the NO. field. If you pay liabilities by Electronic Funds Transfer (EFT), clear the To Be Printed checkbox and type EFT in the No. field of the liability check.
  6. Select Save & Next or Save & Close.
  7. You’ll see your Payroll Liability Payment Summary and can then review the payments you scheduled, print a copy of the summary, and print checks.
  8. You can re-run the QuickReport to see the difference in the liabilities credit you are still able to claim if your credit was larger than your liability.

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