On March 27, 2020, the President signed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) into law. While the Paycheck Protection Program (PPP), which was included within the CARES Act, has received significant publicity, it only applies to small businesses.
The Employee Retention Payroll Tax Credit is another incentive within the CARES Act that is not limited to small businesses and is intended to encourage employers to keep employees on the payroll as they navigate the unprecedented effects of COVID-19. (One very important thing to note is that if an employer receives a PPP loan, the employer is not eligible for this tax credit.)
Here, we’ve outlined the specifics about the Employee Retention Payroll Tax Credit that can help businesses take advantage of its benefits.
What is the Employee Retention Payroll Tax Credit?
The Employee Retention Payroll Tax Credit permits an eligible employer (sole proprietor, LLC, corporation or tax-exempt entity) to claim a credit against the Social Security taxes imposed on the employer for each calendar quarter in an amount equal to 50% of the eligible wages paid after March 12, 2020 and before January 1, 2021 to each eligible employee. The maximum credit is $5,000 per employee.
Which Employers are Eligible for the Employee Retention Payroll Tax Credit?
An eligible employer is an employer that actively carries on a trade or business during calendar year 2020, including tax-exempt organizations, and meets either of the two following tests:
- Government Order Test: An employer is an eligible employer if it experiences a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19.”
- Reduced Gross Receipts Test: An employer is an eligible employer if it experiences a significant decline in gross receipts. For purposes of the retention credit, a significant decline in gross receipts is defined as a decline in gross receipts of at least 50 percent when compared to the same calendar quarter in 2019.
Many companies have requested more guidance from the Treasury about the application of the criteria listed above. Will a voluntary shut down to meet the government social distancing guidelines count for purposes of this credit? Further guidance will hopefully clarify this.
What are Eligible Wages under the Employee Retention Payroll Tax Credit?
In order to determine eligible wages for the Employee Retention Payroll Tax Credit, the average number of full-time and full-time equivalent (FTE) employees employed during 2019 must be determined.
Eligible wages for an eligible employer that had an average number of full-time and full-time equivalent employees in excess of 100 during 2019 are wages paid to an employee who is not providing services due to the effects of the pandemic. In addition, eligible wages paid to an employee in this category cannot be in excess of the amount such an employee would have been paid 30 days immediately preceding the pandemic.
Eligible wages for an eligible employer that had an average number of less than 100 full-time and full-time equivalent employees during 2019 are all wages paid to an employee during the time period in which the employer is considered an eligible employer, subject to the maximum of $10,000 per employee for all calendar quarters.
Wages under this provision mean all amounts paid for employment, including cash and non-cash benefits from March 13, 2020 to December 31, 2020. Eligible wages also include qualified health plan expenses. This provision allows eligible employers to treat qualified health plan expenses as qualified wages when no other qualified wages are paid by the eligible employer or to the employee to which such expenses are allocable. It is important to note that eligible wages do not include any wages paid under the provisions of the Families First Coronavirus Response Act.
In other words, an eligible employer can receive tax credits under the Families First Coronavirus Response Act and the Employee Retention Payroll Tax Credit, but not for the same wages. Also, according to the IRS, the employer “may not treat as qualified wages amounts paid to employees for paid time off for vacations, holidays, sick days and other days off,” unless the employer averaged 100 or fewer full-time employees in 2019.
How is the Employee Retention Payroll Tax Credit Calculated?
Eligible wages paid to each individual employee that may be used to calculate the employee retention payroll tax credit for all calendar quarters may not exceed $10,000. In other words, the employer is allowed a maximum $5,000 credit per employee for all calendar quarters for wages paid after March 12, 2020 through December 31, 2020. It is important to remember that the Employee Retention Payroll Tax Credit is separate from any credit allowable under the Families First Coronavirus Response Act and is calculated separately.
In any calendar quarter in which the amount of the credit is in excess of the OASDI taxes imposed on the employer, such excess is treated as a refundable overpayment. In anticipation of receiving the credits, employers can fund qualified wages by reducing employment tax deposits with the IRS or by requesting an advance of the credit from the IRS on Form 7200 Advance Payment of Employer Credits Due to COVID-19.
Connect With An Advisor
Every business is unique, and each has different needs. The best way to effectively position your business with the benefits of Employee Retention Payroll Tax Credit is to partner with a tax advisor who understands your industry and tax law.
If you believe your business qualifies for the Employee Retention Payroll Tax credit, reach out to a Warren Averett advisor.
This article reflects our views at the time this article was written and should be used as reference only. We recommend that you talk to your Warren Averett advisor, or another business advisor, for the most current information or for guidance specific to your organization.