As the coronavirus continues to overwhelm our nation’s economic and health systems, new tax credits have been introduced to ease the financial hardship placed upon families and business throughout the country. One such credit, the Employee Retention Credit, was included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
The Employee Retention Credit allows eligible employers to receive credit for wages paid while their business is partially or totally suspended due to governmental authority limiting commerce, travel, or group meetings due to COVID-19 or the business is experiencing significant decline in gross receipts.
Taxpayers receiving a loan under the Paycheck Protection Program are not eligible for the Employee Retention Credit.
Employers receiving a Work Opportunity Tax Credit for an employee cannot include the same employee in the computation of this Employee Retention Credit.
Keeping in mind the important notes above, employers are split into two categories based on their number of full-time employees.
Employers with Less Than 100 Full-Time Employees
Employers with less than 100 full-time employees can claim the credit on wages paid between March 12, 2020, and January 1, 2021, in a quarter they have had to suspend operations or have had a significant decline in receipts.
Employers are considered having suspended operations if they were required to fully or partially suspend operations as a result of orders from an appropriate governmental authority due to the COVID-19 outbreak.
Employers are considered to have a significant decline in receipts where gross receipts declined at least 50% as compared to same quarter last year. The credit will be allowed until the gross receipts exceed 80% of the gross receipts for the same quarter in the prior year.
Businesses with More Than 100 Full-Time Employees
Businesses with 100 or more full-time employees can only claim the credit during the period in which operations were suspended.
How the Credit Works
Eligible employers are allowed a credit against employment taxes for each calendar quarter they had a suspension order or a significant decline in receipts in the amount of 50% of qualified wages, which are limited to $10,000 per employee. Qualified health plan expenses, such as amounts paid to maintain a group health plan, are considered qualified wages.
The maximum credit allowed is $5,000 per employee. Any credit in excess of employment tax will provide a refund to the employer.
How to Claim the Credit
There are three ways to claim the credit:
Filing Form 941 – Employer’s Quarterly Federal Tax Return - note the credit will be added in time for filing the second quarter 2020 form. Qualified wages paid between March 12 and March 31 should be reported on the 2nd Quarterly Tax Return due July 31st.
Reducing the next required federal tax deposit, which includes taxes withheld from employees, by the anticipated credit.
Filing Form 7200 to request an advance on the credit. This method should only be used if the anticipated credit is greater than the required federal tax deposit.
There are many implications for each filing method. We are available to assist you with this decision. The Employee Retention Credit provides financial relief for those businesses that continue to pay employees during suspended operations or significant reduction in gross receipts but do not otherwise qualify or choose not to apply for a Paycheck Protection Program loan.
If you need help calculating the Employee Retention Credit for your business, call on us. Also, let us know if you would like our assistance in delaying payment of employer payroll taxes not covered by the credit. In the meantime, continue to visit our COVID-19 Tax Resource Center for up-to-date information on how the outbreak may affect your tax filings, payments, and planning. We encourage you to share the page with others. Through this unprecedented series of events, you can count on The Tax Warriors® at Drucker & Scaccetti to help.