On March 27th, President Trump enacted the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The historic $2.2 trillion stimulus bill includes a wide range of business tax provisions, including a new credit for employers that retain their employees.
Below, we address some of the common questions regarding this particular initiative. If you cannot find the answer to your question, please do not hesitate to reach out to your Pivot CPAs accounting advisor for further assistance.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a new tax credit created by the CARES Act. It is fully refundable for eligible employers. It applies to qualified wages paid between March 12, 2020 and January 1, 2021.
Do I qualify for the credit?
For the purposes of the ERC, eligible employers are employers, including tax-exempt organizations, that carry on a trade or business during 2020. To be eligible, an employer must fit one of these two criteria:
- Suspended operations, either fully or partially, during any calendar quarter in 2020 as a result of government orders regarding COVID-19 (limitations on commerce, travel, or group meetings for commercial, social, religious, or other purposes). Partial suspension occurs when an operation can continue to operate but not at its normal capacity.
- Experienced a significant decline (more than 50% as compared to the same quarter in 2019) in gross receipts during the calendar quarter.
Who does not qualify for the credit?
Neither governmental employers nor self-employed individuals are eligible for this credit.
How much is the credit?
The ERC is equal to 50 percent of qualified wages paid to employees by eligible employers. Eligible employers may take into account up to $10,000 in qualified wages per employee. This means that the maximum credit per employee is $5,000 for the entire year.
What are qualified wages?
Qualified wages (QW) are wages and compensation paid to employees of eligible employers between March 12, 2020 and January 1, 2021. QW include qualified health plan expenses.
The definition of QW varies depending on if an eligible employer has greater than 100 full time employees or equal to or less than 100 full time employees.
- Greater than 100 full time employees (on average in 2019): QW are wages paid to employees that are not providing services while the employer is considered an eligible employer. Wages taken into account may not exceed what the employee would have been paid for working during the 30 day period just prior to the period of economic hardship.
- Equal to or less than 100 full time employees (on average in 2019): QW are wages paid to all employees, whether or not they are providing services while the employer is considered an eligible employer.
How do I claim the credit?
To claim the ERC, eligible employers will need to report quarterly qualified wages paid on their federal employment tax return (usually Form 941, Employer’s Quarterly Federal Tax Return).
Can I fund my payments of qualified wages in advance?
Yes, eligible employers who anticipate receiving the credits can fund qualified wages by reducing their federal employment tax deposits. They will not incur a failure to deposit penalty under section 6656 for doing so. The eligible employer should account for the reduction in deposits on Form 941, Employer’s Quarterly Federal Tax Return.
Additionally, if an eligible employer does not have sufficient federal employment taxes set aside to fund their qualified wages, they can file Form 7200, Advance Payment of Employer Credits Due to COVID-19 to claim an advance refund.
If I receive the ERC under the CARES Act, can I still receive the tax credits for qualified leave wages under the FFCRA?
Yes, eligible employers can receive both credits, but not for the same wages.
If I receive the ERC, can I still receive a Small Business Interruption Loan under the Paycheck Protection Program?
No, eligible employers may not receive both the ERC and a Small Business Interruption Loan.
Can I receive ERC for wages paid to employers who are also owners or part owners of my eligible employer?
For the purposes of the ERC, wages paid to any individual who is more than 50% owner and/or familial relations of the eligible employer (including children, parents, aunts, uncles, certain cousins, and more), may not count towards the ERC.