Tax Monitor

The CARES Act Employee Retention Credit: Another Tool for Employers Experiencing Financial Challenges in the Wake of the COVID-19 Pandemic

April 15, 2020

By: Valerie F. Gainer and

In COVID-19 new reality, employers are struggling to balance the retention of their employees with the survival of their business. The Employee Retention Credit under the CARES Act offers some relief.

ERC Basics

The Employee Retention Credit (“ERC”) allows an Eligible Employer to receive a tax credit in the amount of 50% of the Qualified Wages it pays to employees. Understanding the impact of the ERC necessitates hopping through several definitions. 

First, an “Eligible Employer” is an employer carrying on a trade or business in 2020 that (1) completely or partially suspends operation during a 2020 calendar quarter because of certain government orders relating to COVID-19; or (2) suffers a significant decline in gross receipts during a 2020 calendar quarter. According to the Internal Revenue Service (“IRS’), a business may be partially suspended if it continues to operate at less than its normal capacity, such as a restaurant that provides carry-out orders but cannot offer its usual dining room service due to governmental orders. A business begins to experience a significant decline in gross receipts when its gross receipts for a 2020 quarter are less than 50% of its gross receipts for the corresponding 2019 quarter. A business will continue to be treated as suffering from a significant decline in gross receipts throughout the 2020 calendar year until the quarter following the first quarter in which the business’s gross receipts increase to an amount greater than 80% of the business’s gross receipts in the corresponding 2019 quarter. 

“Qualified Wages” differ depending on the size of the Eligible Employer. For Eligible Employers that had on average over one-hundred (100) full-time employees in 2019, Qualified Wages are wages paid to an employee during the period in which that employee is not working as the result of (1) the complete or partial suspension of operations because of certain government orders relating to COVID-19; or (2) a significant decline in gross receipts. For Eligible Employers that had on average less than one-hundred (100) full-time employees in 2019, Qualified Wages are any wages paid to an employee during (1) the complete or partial suspension of operations because of certain government orders relating to COVID-19; or (2) a significant decline in gross receipts. Regardless of the size of the Eligible Employer, only wages paid between March 13, 2020 and December 31, 2020 can be considered Qualified Wages. Importantly, certain qualified health plan expenses count as Qualified Wages for purposes of the ERC.

A cap exists on the amount of Qualified Wages paid to each employee that may be considered for calculating the ERC. Only $10,000 in Qualified Wages for each employee in the year 2020 may be counted toward the Eligible Employer’s ERC. This means that the maximum credit an Eligible Employer can receive is $5,000 per employee. The IRS has provided an excellent explanation of how this limitation affects the credit calculation:

Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the Eligible Employer for the qualified wages paid to Employee A is $5,000.

Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.¹ 

 

ERC Impact

The ERC is applied against the Eligible Employer’s social security portion of FICA. If the ERC exceeds what it owed by the Eligible Employer, the overage is considered an overpayment. The overpayment will be utilized to satisfy any other tax liabilities on Form 941. Any amount remaining thereafter will then be refunded to the Eligible Employer.

Eligible Employers expecting to take advantage of the ERC can even offset their payment of Qualified Wages with their anticipated federal employment tax deposits. An Eligible Employer can apply the funds it has set apart for federal employment taxes to pay Qualified Wages, but it must report such treatment on Form 941. The Eligible Employer is still required to deposit any difference between its paid Qualified Wages and the federal employment taxes it owes with the IRS.

If an Eligible Employer expects to receive an ERC that is greater than what it has set aside for payment of federal employment taxes, it may be able to receive an advanced ERC by filing a Form 7200.  

Important ERC Limitations

Employers receiving Paycheck Protection Loans are not permitted to receive the ERC. Additionally, while an employer may receive both the ERC and Families First Coronavirus Response Act tax credits for qualified sick and family leave wages, the same wages may not count towards both credits.

Jackson Kelly is prepared to answer any questions you may have as you analyze which CARES Act provisions are most beneficial to your business.

 

¹  See INTERNAL REVENUE SERVICE, FAQs: Employee Retention Credit under the CARES Act (https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act).