The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) contains a number of relief provisions for small businesses. Most of the attention regarding the CARES Act has been around programs such as the Paycheck Protection Program (PPP) loan, the Economic Injury Disaster Loan (EIDL), and other individual and corporate tax related matters such as stimulus rebate checks. One item within the CARES Act that seems to have flown under the radar is the Employee Retention Credit (ERC). The ERC is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Similar to the PPP, the purpose of the ERC is to encourage employers to keep employees on the payroll, even if they are not working due to the effects of COVID-19. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- fully or partially suspended operations of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19 or
- a significant decline in gross receipts.
A significant decline in gross receipts begins:
- on the first day of the first calendar quarter of 2020
- for which an employer’s gross receipts are less than 50% of its gross receipts
- for the same calendar quarter in 2019
The significant decline in gross receipts ends:
- on the first day of the first calendar quarter following the calendar quarter
- in which gross receipts are more than 80% of its gross receipts
- for the same calendar quarter in 2019
For example, if you’re the owner of a restaurant, most likely you have had to shut down operations regarding table seating within the restaurant, but you might still be offering takeout services. In this instance, your business would qualify for this credit. The significant decline in gross receipts test would apply whether your business was affected by COVID-19 or not. The credit applies to qualified wages (including certain health plan expenses) paid during this period or any calendar quarter in which operations were suspended.
The table below illustrates how these two qualification tests work:
|Quarter 2020||% of 2019 Receipts||Government Order|
|January to March||85%||Yes|
|April to June||15%||Yes|
|July to September||85%||No|
|October to December||95%||No|
The key to the two qualification test is the word “or.” In accordance with the two qualification test, a business only has to meet one or the other of the requirements to qualify for the ERC. In the example above, the business would qualify for the ERC in the 1st, 2nd, and 3rd quarter. Based upon the requirements noted above, neither test would apply in the 4th quarter and therefore the business would not qualify for the credit in that quarter.
The definition of qualified wages depends on average eligible full-time employee counts during 2019. For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit.
If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to 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.
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages, including healthcare 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 its employees are providing services.
The below table is an example of how the cost of the ERC works:
|Quarter||Qualified||Employee Wage||FICA||Regular Payroll||Credit||New Payroll|
Using the qualification table noted above, this table shows that the regular payroll for the periods under review would have been $21,530.00. With the ERC, the payroll cost drops to $16,530.00. The maximum amount of the credit is 50% of $10,000 in qualifying wages. In this example, the credit will be applied to wages in the 1st and 2nd quarter. Although the qualification test applies to the 3rd quarter, because the maximum amount of the credit has been met through the 2nd quarter, no credit would be available in the 3rd quarter.
Claiming the Credit
In order to claim the ERC, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures. For example, if your credit in the 1st quarter is $12,500 and you are scheduled to deposit $15,000 as the total tax deposit, reduce the deposit by $12,500 and deposit $2,500. You will account for this credit on Form 941, which must be filed by April 30, 2020.
Starting in the 2nd quarter of 2020, if your credit for the 1st quarter exceeds the amount withheld for payroll taxes, you can receive an advance payment from the IRS by submitting Form 7200, Advance of Employer Credits Due To COVID-19. Businesses can submit Form 7200 any time during the month following the quarter for which a claim is being made. For example, if your credit for the 1st quarter was $20,000 and you were scheduled to remit $18,000, your credit would eliminate the amount of the businesses tax deposit and leave a credit of $2,000. This credit can be applied for refund through Form 7200 noted above anytime during April 2020.
Impact of Other Credit and Relief Provisions
An eligible employer’s ability to claim the ERC is impacted by other credit and relief provisions as follows:
- If an employer receives a Small Business Interruption Loan under the PPP, authorized under the CARES Act, then the employer is not eligible for the ERC.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
- Wages counted for this credit can’t be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.
To learn more about the ERC, or if you have any questions regarding this information, please contact David Blain, CPA, CVA, Partner & Director of Entrepreneurial Services at McKonly & Asbury at firstname.lastname@example.org or by calling (717) 972-5722. To learn more about the CARES Act and options for businesses, please visit our COVID-19 Resource Center for the latest updates.
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 McKonly & Asbury 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.