On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted, and with it, the Employee Retention Credit. The credit is meant to encourage eligible employers to keep their employees, despite economic hardships.
The Employee Retention Credit
The Employee Retention Credit is a refundable tax credit for eligible employers that is equal to 50% of qualified wages and allocable qualified health plan expenses paid to employees. The credit applies to wages paid after March 12, 2020 and before January 1, 2021. The maximum amount of qualified wages for each employee for all calendar quarters is $10,000. Therefore, the maximum credit an employer could receive for each employee in a quarter is $5,000.
Eligibility for the Employee Retention Credit
Eligible employers are organizations that carry on a trade or business during the 2020 calendar year who either:
- Fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID 19.
- Experiences a significant decline in gross receipts during the calendar year.
- The point at which it would be considered a significant decline in gross receipts is at the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50% of their gross receipts for the same calendar quarter in 2019.
- The significant decline in gross receipts is considered to be at an end when an employer’s 2020 gross receipts are greater than 80% of their gross receipts for the same calendar quarter in 2020.
Governmental employers are not eligible, nor are self-employed individuals for their self-employment services or earnings.
If an employer has received a loan under the Paycheck Protection Program, they are not eligible to claim the Employee Retention Credit.
Qualified Wages for the Purpose of the Employee Retention Credit
Qualified wages are those paid by an eligible employer after March 12, 2020 and before January 1, 2021. These wages also include qualified health plan expenses that are allocable to the wages. The definition of the qualified wages depends on the average number of full-time employees during 2019.
If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are wages paid to an employee for time that the employee is not providing services due to a full or partial suspension of operations by order of a governmental authority for reasons related to COVID-19 or a significant decline in gross receipts. The qualified wages taken into account for these employers cannot exceed what an employee would have been paid for working an equivalent duration during the 30-day period prior to the period of economic hardship.
If an eligible employer averaged 100 full-time employees or less in 2019, qualified wages are wages paid to any employee during any period of economic hardship that is due to ceasing operations by order of a governmental authority for reasons related to COVID-19 or a significant decline in gross receipts.
Under the CARES Act, an employer is not required to pay qualified wages; also, an employer can elect not to claim the credit.
Claiming the Employee Retention Credit
Eligible employers can take the credit against the employer share of Social Security taxes, as well as for the portion of taxes imposed on railroad employers that corresponds to the Social Security taxes.
Eligible employers will report their total qualified wages, as well as the related credits for each calendar quarter on their federal employment tax returns (usually Form 941).
Employers may reduce the amount of federal employment taxes they deposit for that quarter by half of the amount of the qualified wages paid in that calendar quarter without incurring a failure to deposit penalty if:
- the employer paid qualified wages to their employees in the calendar quarter before the required deposit,
- the amount of the federal employment taxes that the employer does not timely deposit, reduced by any amount of federal employment taxes not deposited in anticipation of the paid sick or family leave credits claimed under the Families First Coronavirus Response Act (FFCRA) is less than or equal to the amount of the anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and
- the employer did not seek an advance credit by filing Form 7200 for any portion of the anticipated credits they relied upon to reduce their deposits.
The employer would need to account for the reduction in deposits on the Form 941 for the quarter.
Another option for employers to fund qualified wages is to file Form 7200 with the IRS, requesting an advance of the refundable credit.
An eligible employer can take both the tax credits for the qualified leave waged under the FFCRA and the employee retention credit; however, it cannot be for the same wages.
If you have any questions on the Employee Retention Credit, please contact a BSSF Advisor!
Disclaimer: This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.