The Employee Retention Credit is a refundable tax credit against payroll taxes equal to 50% of qualified wages a qualifying employer pays to employees after March 12, 2020, and before January 1, 2021. The maximum qualified wages per employee is $10,000, Therefore, the maximum credit per employee is $5,000.
The credit is available to all qualifying employers regardless of size, including tax-exempt organizations. It is necessary to have employees. A sole practitioner with no employees would not qualify.
Note: PPP borrowers were not eligible for the employee retention credit under the CARES Act, but are now eligible under the Consolidated Appropriation Act of 2021 that was signed into law on December 27, 2020. This change is retroactive to 2020, but only with respect to wages not paid with forgiven PPP loan proceeds.
Employers are eligible for the tax credit if they operate a trade or business in 2020 and experience either:
- Full or partial suspension of business during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19, or
- A significant decline in gross receipts, which is defined as the first quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts of the same calendar quarter in 2019. The significant decline ends with the calendar quarter in which gross receipts are more than 80% of gross receipts for the same calendar quarter in 2019.
The first test, the “suspension” test, could be satisfied if there were orders from government officials, whether federal, state or local. Orders from an appropriate governmental authority satisfy this rule if they limit commerce, travel or group meetings due to COVID-19 in a manner that affects the employer’s business. This would include orders that limit the hours of operation.
If the orders are from a state or local government, it needs to have jurisdiction over the employer’s operations.
A “state of emergency” doesn’t necessarily satisfy this rule unless it limits commerce, travel or group meetings in some manner. A governmental declaration doesn’t satisfy the tax requirements unless it actually affects the employer’s operation of its trade or business. For example, a curfew wouldn’t satisfy this rule unless it actually affected the employer’s operations.
Examples: Government orders for this purpose include the mayor stating non-essential businesses need to close for a time. A state’s proclamation of sheltering in place would qualify as a government order. A governor’s order closing non-essential businesses would qualify as to those businesses.
A business in multiple locations ordered to suspend operations in some but not all locations would qualify.
The suspension of operations under governmental order has to be more than nominal. Business as usual but working from home wouldn’t qualify.
A governmental shutdown of a supplier that results in the essential business operations being partially or totally suspended can qualify as a suspension, particularly when there isn’t the ability to access an alternate supplier.
A business that voluntarily suspends operations or reduces hours would not satisfy the suspension rule but may well qualify under the rule looking to a decline in gross receipts.
For tax-exempt organizations under 501(c) of the tax code, the requirement to be partially or fully suspended applies to all operations of the organization. Tax-exempt organizations cannot use the gross receipts option for qualification, only the suspension rule.
Maximum wages that can be considered for all quarters as eligible for this credit are $10,000 per employee for the period March 12, 2020, to December 31, 2020. Qualified wages are determined based on how many employees an eligible employer has.
- Employers with 100 or fewer full-time employees during 2019 – Wages, including health care costs (up to $10,000 per employee), paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not the employees are providing services.
- Employers with more than 100 full-time employees during 2019 – Wages, including certain health care costs (up to $10,000 per employee), paid to employees who did not work during the calendar quarter because the employer’s business is fully or partially suspended because of a government shutdown due to COVID-19 or because there has been a significant decline in the business’s gross receipts. Qualified wages for these employees cannot exceed the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
NOTE: Wages do not include wages paid under the family and/or sick leave provisions of FFCRA, the Families First Coronavirus Response Act. In addition, wages claimed for employees under the Work Opportunity Credit do not qualify as wages that may increase this credit. Wages paid to relatives or family members generally do not qualify. With entities, one applies these relationship rules depending on a particular level of ownership.
Claiming the Credit
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes, including federal income tax withholding, up to the amount of the allowable credit of $5,000 per employee.
There are aggregation rules that can affect parent-subsidiary or brother-sister groups, or a combined group of corporations. These complex rules can also reach partnerships, trusts and estates. Aggregation can affect qualification in such areas as to whether there is a full or partial shutdown as well as measuring the decline in gross receipts.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (Form 941, or the newly amended Form 941-X) beginning with the second quarter of 2020.
If the employer’s employment tax deposits are less than the computed credit, eligible employers can request an advanced payment from the IRS by submitting Form 7200. Any advance payments on the Form 7200 would need to be reconciled with total credits and taxes on the payroll tax returns. Form 7200 isn’t required. If it is used, any corrections to the Form 7200 are handled via the payroll tax reports, not amending the Form 7200. For reporting details, see also “How to Claim the Credits,” irs.gov, https://www.irs.gov/newsroom/how-to-claim-the-credits.
The refundable credit isn’t limited to the amount of payroll taxes.
Good recordkeeping is critical considering the complexity of the rules, including support for the calculation of qualified wages, employee work hours and health plan expenses.
In partial or total suspension circumstances, it is also important to document the particular government actions that impact your business.
Deferral of Employer Social Security Taxes
Note: If an employer receives a Paycheck Protection Program Loan and is using the forgiveness of indebtedness option, this deferral is not available.
(6.2% of wages), or the RRTA taxes imposed on an employer, up to the amount of regular Social Security tax, from date of enactment March 27, 2020, through December 31, 2020. The deferral must be repaid in two payments with 50% of the deferral due December 31, 2021, and the remaining balance due on December 31, 2022.
This payroll tax deferral is available to all employers with no size restriction. For an employer to take advantage of the deferral, they will reduce payroll deposits between the enactment date of March 27, 2020, through December 31, 2020, by the amount of the employer’s share of the Social Security tax. If the employer uses a third-party payroll processor or a professional employer organization (PEO) for payroll processing, and the employer instructs the third-party or PEO to defer tax payment, the CARES Act requires the employer to bear the responsibility for timely payment of the taxes in 2021 and 2022. It will not be the responsibility of the third-party processor or the PEO.
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