The IRS released Fact Sheet, FS-2020-05, in May 2020. This fact sheet details specific Employer Retention Credit points made in The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) that encourage businesses to keep employees on their payroll. IR-2020-62, “the original Employer Retention Credit,” was first posted on 3/31/2020. Both documents describe assistance for businesses with workers not being forced to choose between their paychecks and the public health measures needed to combat COVID-19. Eligible employers can claim an Employee Retention Credit for wages paid after 3/12/2020 and before 1/1/2021.
The Employee Retention Credit (“ERC”) is available to all employers that have experienced an economic hardship due to COVID-19. This includes tax-exempt organizations. Two exceptions apply:
Federal, state & local governments and their instrumentalities
Small businesses that receive small business loans under the Paycheck Protection Program.
For purposes of the ERC, employers experiencing an economic hardship include those with suspended operations due to government orders related to COVID-19 or those who have experienced a significant decline in gross receipts. In addition, an employer may have had to fully or partially suspend operations because a governmental order limited commerce, travel, or group meetings due to COVID-19 in a manner that prevented the employer from operating at normal capacity during the specified time.
The ERC states that in order to qualify, a “significant decline in gross receipts” begins in the first calendar quarter of 2020 in which an employer’s gross receipts are less than 50% of its gross receipts for that same quarter in 2019. Further stating that “the decline ends the first calendar quarter in 2020 after the quarter in which the employer’s gross receipts are greater than 80% of its gross receipts for the same quarter in 2019.” It is the responsibility of the employer to calculate the measures each calendar quarter.
The tax credit is comprised of 50% of up to $10,000 in qualified wages paid to each employee. The employer’s maximum credit for qualified wages paid to any employee is $5,000. Qualified wages also include the cost of employer-provided health care premiums and expenses.
Wages that qualify for the ERC vary. The ERCs are based on the average number of an employer’s full-time employees in 2019. For example, if the employer had 100 or fewer employees on average in 2019, the ERC is based on wages paid to all employees, regardless if they worked or not.
Another example is If the employer had more than 100 employees on average in 2019. The ERC is then allowed only for wages paid to employees for the time they did not work. In each case, the wages that qualify are for wages paid for a calendar quarter in which the employer experiences an economic hardship.
The amount of qualified wages for which an eligible employer may claim the ERC does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act (“FFCRA”). The employer is not allowed to use the same wages to determine the amount of the ERC.
To claim the ERC, beginning with the second calendar quarter of 2020, employers must report their total qualified wages and the related health insurance costs for each quarter on quarterly employment tax returns. Form 941, Employer’s Quarterly Federal Tax Return is the usual form used. Employers can receive the benefit of the ERC even before filing by reducing their federal employment tax deposits by the amount of the ERC. They will account for the reduction in deposits due to the ERC on Form 941. The IRS recently posted an FAQ about the ability both to reduce deposits for the ERC and to defer the deposit of all of the employer’s share of social security tax due before 1/1/21 under a separate provision in the CARES Act (PDF).
Advance payment of the ERC may be requested if employers do not have enough federal employment taxes to cover the amount of the ERC after deferred deposits of employer social security taxes under the CARES Act. As explained in the FAQ, employers are allowed to request advance payment credit by submitting completedForm 7200 via FAX # 855-248-0552. Subject Line: Advance Payment of Employer Credits Due to COVID-19. Employers claiming the ERC are required to keep all employment tax records supporting the credit for a minimum of four years.
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