IRS Issues Guidance on Employee Retention Tax Credit for Employers Under CARES Act by Andreea Cioara, CPA
The IRS today provided details on how it will implement the payroll tax credit included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which encourages U.S. businesses to retain and continue paying employees through the COVID-19 health crisis even when their businesses are shuttered.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit of 50 percent of up to $10,000 in qualified wages eligible employers continue to pay workers between March 12, 2020, and before Jan. 1, 2021, despite their businesses suffering adverse consequences of the coronavirus. According to the IRS, the maximum credit for qualified wages paid to an employee is $5,000.
Because the credit is refundable, amounts in excess of an employer’s portion of their employees’ Social Security taxes will be treated as an overpayment and refunded to the employers or applied to offset any of the employers’ remaining tax liabilities.
Am I Eligible for the Employee Retention Credit?
The credit is available to private-sector employers of all sizes, including non-profit organizations, that meet the following criteria:
- The business’s operations are fully or partially suspended by government order due to COVID-19 during any calendar quarter of 2020, and
- The employer’s gross receipts during a calendar quarter fall below 50 percent of its gross receipts during the same quarter in 2019.
Employers will no longer qualify for the credit when gross receipts exceed 80 percent of a comparable quarter in 2019.
Specifically excluded from eligibility are self-employed taxpayers and employers that receive small business loans.
What Wages Qualify for the Credit?
Qualifying wages include compensation paid to employees and a portion of employers’ costs for providing workers with health insurance during the period of March 12, through Dec. 31, 2020. The amount of wages used to compute the credit depends on an eligible employer’s number of employees.
For businesses with less than 100 employees on average in 2019, the credit is based on the actual wages they paid to all employees during the period of economic hardship, regardless of whether those employees actually worked.
For businesses with more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees who did not work during the calendar quarter due to a full or partial COVID-19-related suspension of business operations. Wages may not exceed the amount employees would have been paid for working during the 30 days immediately preceding the period of economic hardship.
Can I Receive Both the Employee Retention Credit and the Expanded Paid Sick Leave Tax Credit under the Families First Coronavirus Response Act (FFCRA)?
Employers may receive both credits but not for the same wages. The amount of wages a business claims as an Employee Retention Credit may not include the amount of wages they pay for qualified sick and family leave.
How do I Receive the Employee Retention Credit?
Businesses may be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will need to report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or IRS Form 941 beginning with the second quarter of 2020. If an employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
About the Author: Andreea Cioara Schinas, CPA, is a director in the Tax Services practice of Berkowitz Pollack Brant Advisors + CPAs practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at info@bpbcpa.com.
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