Congress recently passed significant legislation to aid businesses during these unprecedented times. The Paycheck Protection Program (PPP) receives much of the media's attention, but there are other aspects of the Act available for use by employers. One of those is the Employee Retention Credit (ERC). As with most provisions of the CARES Act, the ERC is designed to encourage employers to maintain employees on their payroll.
- What is the ERC? The ERC provides a refundable tax credit against certain employment taxes for up to 50 percent of the qualifying wages paid by an eligible employer to an employee. Qualified wages are capped at $10,000, resulting in a potential overall credit of $5,000 per employee for the year.
- Who is eligible for the ERC? Eligible employers are those who have experienced a full or partial suspension of business activities because of a governmental order related to COVID-19 or are those who, without an order, have experienced more than a fifty percent decline in gross receipts compared to the same quarter a year ago. Eligibility is determined on a quarter by quarter basis. Under the gross receipts test, an employer remains eligible each quarter until its gross receipts reach eighty percent of the prior year's numbers for the same timeframe. The credit applies to all eligible employers regardless of size, including tax exempt organizations and tribes or tribal entities operating a trade or business. It does not apply to governmental entities and their agents.
- What are Qualified Wages? What constitutes qualified wages depends on the size of the employer. For employers with more than an average of 100 full-time employees, qualified wages are those wages, including healthcare costs, paid to employees who are not working because business operations were suspended or because the employer's gross receipts declined. For employers with less than an average of 100 full-time employees, qualified wages include those wages, plus healthcare costs, paid to all employees regardless of whether they are working during the period operations were suspended or a decline in gross proceeds occurred. In computing the “average of full-time employees,” employers use their 2019 employee numbers.
- When does the ERC apply? Eligible employers may claim the ERC for qualified wages paid after March 12, 2020, and before January 1, 2021.
- How does an Employer claim the credit? One benefit of the credit is that it is immediately available upon the filing of an employer's quarterly employment tax return with the Internal Revenue Service. An eligible employer may retain, from the employment taxes due, an amount equal to the available credit. The employment taxes that are available for offset include the withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes. If there are not enough employment taxes available for the credit offset, employers can immediately file a request for an advance payment from the IRS using Form 7200.
- Exclusions to the ERC. The ERC does not apply to employers who received loan proceeds through the PPP, and it does not apply to wages an employer receives a credit for under the Family First Corona Virus Response Act (FFCRA). An eligible employer may receive both the ERC and credit for wages paid under the FFCRA, but the employer cannot use the same wage payments for each credit. Finally, if an employer claims a Work Opportunity Tax Credit for an employee, that employee cannot be counted for the ERC.
Anyone interested in the ERC should consult an attorney or tax preparer to determine their eligibility and qualification.