Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act that was signed into law on March 27, 2020, certain eligible businesses are allowed to claim a new Employee Retention Credit (ERC). The purpose of this payroll tax measure is to incentivize employers to keep employees on the payroll even though the business is adversely impacted by the new coronavirus. Tax professionals should familiarize themselves with this provision, as well as the ability for their clients to defer payroll tax, to help their clients. This credit is not available to businesses that receive a loan under the Paycheck Protection Program.
The ERC is taken against qualifying payroll taxes. The refundable tax credit is up to 50 percent of the total employee wages, up to a maximum of $10,000 of wages ($5,000 credit) per employee. An eligible business is allowed to include a portion of employer-provided health insurance expenses allocable to qualified wages in the wage base. The credit is calculated for each calendar quarter after March 12, 2020, and before Jan. 1, 2021. The qualifying wages are based on the average number of employees in 2019.
The employer can get immediate access to the credit by reducing their required payroll tax deposits that would have otherwise been made. So, you would report 50 percent of wages between March 13, 2020, and March 31, 2020, and April through June on the second quarter Form 941, Employer’s Quarterly Federal Tax Return. If tax deposits are not sufficient to cover the credit, the business may claim an advance payment of the refundable tax credit for qualified wages by filing Form 7200, Advanced Payment of Employer Credit Due to COVID-19.
Eligible employers are those who carry on a trade or business during calendar year 2020, including a tax-exempt organization, and either of the following:
- The business was fully or partially suspended by a government order due to COVID-19.
- Gross receipts are below 50 percent of the comparable quarter in 2019 (eligibility ends when gross receipts are more than 80 percent of the comparable quarter in 2019).
- If an employer averaged 100 or fewer full-time employees during 2019, all qualified wages are eligible, regardless of whether the employee is furloughed.
- If an employer averaged more than 100 full-time employees during 2019, include only the qualified wages of employees who are furloughed or face a reduction of hours as a result of business closure or a reduction in gross receipts.
How to claim the credit
Beginning with the second quarter of 2020, the employer may claim the ERC on Form 941. The credit is taken against the employer’s share of Social Security tax, and any excess is refundable. If the credit amount for any calendar quarter exceeds the payroll taxes, the employer can claim a refund of the excess on the employment tax return. Employers can also request an advance of the ERC by filing Form 7200.
Overlap with other provisions
Businesses are ineligible to receive the employee retention credit if they take a Paycheck Protection Program (PPP) loan. They also need to exclude any wages for which the employer claimed a tax credit for 1) paid sick and family leave under the Families First Coronavirus Response Act (FFCRA), 2) the Employer Credit for Paid Family and Medical Leave, and 3) the Work Opportunity Credit.
IRS examples of how the credit works
- A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state in order 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.
- An 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.
- An eligible employer pays $10,000 in qualified wages to employee A in Q2 2020. The ERC available to the eligible employer for the qualified wages paid to employee A is $5,000. This amount may be applied against the employer share of Social Security taxes that the eligible employer is liable for with respect to all employee wages paid in Q2 2020. Any excess over the employer’s share of Social Security taxes is treated as an overpayment and refunded to the eligible employer after offsetting other tax liabilities on the employment tax return and subject to any other offsets.
Key takeaways and planning considerations
The ERC gives business owners that are adversely impacted by the coronavirus a $5,000 refundable credit for each full-time employee retained between March 13 and Dec. 31, 2020. However, a business is not allowed to claim this credit in addition to the PPP loan, so you’ll want to help your clients figure out which of these provisions yields a better benefit.
The ERC is available to employers of any size, and the employer does not need to fill out an application. The business needs to have the money available to pay employees up front (or wait for an advance).
For more information, visit the IRS Employee Retention Credit page and FAQs, or visit the Intuit Accountant and Tax Professional COVID-19 Resource Center
Mike D’Avolio, CPA, is senior tax analyst with the Intuit ProConnect. D’Avolio has been a small-business tax expert for more than 20 years and serves as the primary liaison with the Internal Revenue Service for tax law interpretation matters, manages all technical tax information, and supports tax development and other groups by providing them with current tax law developments, analysis of tax legislation and in-depth product testing.