FAQs: Employee Retention Credit under the CARES Act
What is the Employee Retention Credit?
The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of qualified wage cost (wages and qualified health plan expenses) that Eligible Employers pay their employees. This Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wage cost considered with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
What are the limitations on the credit?
If you are an employer with more than 100 employees, the wages eligible for the credit are wages that the employer pays employees who are not providing services due to the suspension of the business or a drop in gross receipts. If you have less than 100 employees, all wages paid qualify for the credit. However, for purposes of the credit, eligible wages do not include wages counted for purposes of the paid sick leave and paid family leave payroll tax credits in the Families First Coronavirus act. Also, if an employer receives a covered paycheck protection program (PPP) loan, the employer is not eligible to claim an employee retention credit. See more on the PPP loan here: https://www.newburg.com/2020/03/sba-loans-and-forgiveness-under-the-new-stimulus-program-cares/
Who is an Eligible Employer?
Eligible Employers for the purposes of the Employee Retention Credit are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either:
- Fully or partially suspends operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experiences a significant decline in gross receipts during the calendar quarter.
Note: Governmental employers are not Eligible Employers for the Employee Retention Credit. Also, Self-employed individuals are not eligible for this credit for their self-employment services or earnings.
When is the operation of a trade or business partially suspended for the purposes of the Employee Retention Credit?
The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can continue to operate but not at its normal capacity.
Example: A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state to reduce the spread of COVID-19. However, the executive order allows those establishments to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. This results in a partial suspension of the operations of the trade or business due to an order of an appropriate governmental authority with respect to any restaurants, bars, and similar establishments in the state that provided full sit-down service, a dining room, or other on-site eating facilities for customers prior to the executive order.
What is a “significant decline in gross receipts”?
A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 % of its gross receipts for the same calendar quarter during 2019.
Example: An employer’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, the employer’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus, the employer is entitled to a retention credit with respect to the first and second calendar quarters.
What if the credit exceeds the employer portion of social security on my 941 filing?
This credit is considered a refundable credit. This means that if the credit is higher than the taxes due on all employees you may be eligible for a refund.
How do I file for the credit?
You will file for the credit on your 941 filing for each quarter. The first filing will be completed on the 941 for Q2 2020. However, for some employers waiting until the 941 is filed to receive money back may not be sufficient. There is an option for early relief by holding some of the amounts they would have deposited. The IRS has established a procedure for obtaining an advance of the refundable credits. The Eligible Employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount. If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the Eligible Employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposit.
How do I calculate the credit?
Below is an outline of how the credit is calculated. You should contact your payroll provider to inquire on how their software will calculate the credit.
The general formula is:
[Employee retention credit = (qualified wages + qualified health plan expenses) X 50%] **up to $10K.
Suppose you are an employer with over 100 employees and you only have two employees in the company who are not working but being paid.
For the period: 4/1/2020-6/30/2020
1st employee gets paid $15K salary and the costs of their health care to the company is $2K for the same period. Their total cost for the period is $17K.
The maximum credit for him would be: $10K X 50% = $5K.
2nd employee is paid $5K salary and their health insurance costs to the company for the period are $1K = $6K total costs.
The credit for her will be $6K X 50% = $3K.
The total credit of $8K would be on your Q2 941.
For Q3 you would have no additional credit for the 1st employee because they were already at the maximum for the credit. For the 2nd employee it would be limited to $2k (4K X 50%) (they hit the maximum $10K cost after an additional $4K of costs).
The credit can offset the employer’s 6.2% share of social security taxes (reported on your 941) and the excess is refundable.
Assuming both employees’ wages are under the social security limit still for 2020, employer social security tax on their wages for the quarter would be: $15K +$5K = $20K X .062 = 1,240.
But the credit allowed is $8K – excess refundable credit of $6,760.
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