Carrying on our tradition of providing you with Solutions Beyond the Obvious, we are pleased to bring you our “Ask the Experts” series of articles. In these articles, our Tronconi Segarra & Associates tax experts identify and explain the significant tax changes that were passed as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act which can provide additional relief for businesses and individuals facing economic hardship as the result of the coronavirus pandemic. Contact your Tronconi Segarra & Associates tax advisor for more information about any of the topics discussed in these articles.
Thomas E. Mazurek, Jr. CPA
The CARES Act created the Employee Retention Credit, which is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages (including qualified health plan expenses) an eligible employer pays to employees in calendar quarter after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so the maximum credit for qualified wages paid to any employee is $5,000.
Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:
- Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experience a significant decline in gross receipts during the calendar quarter.
A “significant decline in gross receipts” begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.
Example: Employer XYZ’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, Employer XYZ’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, Employer XYZ had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus, Employer XYZ is entitled to a retention credit with respect to the first and second calendar quarters.
The definition of “qualified wages” depends, in part, on the average number of full-time employees employed by the Eligible Employer during 2019:
- If the Eligible Employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to an economic hardship, described in (1) or (2) above.
- If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.
The term “full-time employee” means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month (130 hours of service in a month is treated as the monthly equivalent of at least 30 hours of service per week), as determined in accordance with section 4980H of the Internal Revenue Code.
Applying the Credit
The Employee Retention Credit is allowed against the employer portion of the Social Security tax (6.2%) and is “fully refundable” because an Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes it owes. If, for any calendar quarter, the amount of the Credit the eligible employer is entitled to exceeds the employer portion of the social security tax on all wages paid to all employees, then the excess is treated as an overpayment and refunded to the employer. The excess will be applied to offset any remaining tax liability on the employment tax return, and the amount of any remaining excess is reflected as an overpayment on the return.
Claiming the Credit
Eligible Employers will report their total qualified wages for purposes of the Employee Retention Credit for each calendar quarter, beginning with the second quarter, on their federal employment tax returns, usually Form 941. Employers also report any qualified sick leave and qualified family leave wages for which they are entitled to a credit under FFCRA on Form 941, Employer’s Quarterly Federal Tax Return. The Form 941 is used to report income and social security and Medicare taxes withheld by the employer from employee wages, as well as the employer’s share of social security and Medicare tax. In anticipation of receiving the Employee Retention Credit, Eligible Employers can fund qualified wages by (1) accessing federal employment taxes, including withheld taxes that are required to be deposited with the IRS, and (2) requesting an advance of the credit from the IRS for the amount of the credit that is not funded by accessing the federal employment tax deposits, by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
An eligible employer’s ability to claim the Employee Retention Credit is impacted by other credit and relief provisions as follows:
- If an employer receives a Paycheck Protection Program (“PPP”) loan, authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the FFCRA.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.
An employer that applied for a PPP loan, received payment and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an “Eligible Employer” for purposes of the credit.
See Fact Sheet FS-2020-05, New Employee Retention Credit helps employees keep employees on payroll, New Release IR-2020-62, IRS: Employee Retention Credit available for many businesses financially impacted by COVID-19 and frequently asked questions FAQs: Employee Retention Credit under the CARES Act on the IRS website for more information on the employee retention credit.
Please contact your Tronconi Segarra & Associates tax advisor for more information on this or any tax matter. If you do not have a Tronconi Segarra & Associates tax advisor, please call 716.633.1373 or Contact Us through our website with your question.
This article has been prepared for general guidance on matters of interest only; it does not constitute professional advice. You should not act upon the information contained in this article without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy of completeness of the information contained in this article; and, to the extent permitted by law, Tronconi Segarra & Associates LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this article or for any decision based on it.