It's difficult to imagine a topic more top-of-mind with business owners and executives today than revenue and, more specifically, capitalizing on credits provided by our Federal and State governments. Chief among these opportunities is the CARES Act that provides assistance to employers who have experienced significant declines in revenue due to COVID-19.
On its surface the CARES Act seems straight-forward, yet many in business have recently discovered that understanding who can apply for what is not always clear. The following breaks out some of the CARES Act's highlights with a goal of providing clarity around who can apply for what:
The Employee Retention Payroll Tax Credit
The Employee Retention Credit is a fully-refundable tax credit for employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees.
What Wages Qualify?
This Employee Retention Credit applies to qualified wages paid 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 that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
Eligible Employers for the purposes of the Employee Retention Credit are those that carry on a trade or business during calendar year 2020 that either:
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) and (2) above.
For employers with more than 100 full-time employees, qualified wages include wages paid to employees when they are not providing services due to a governmental order related to COVID-19. If an employee is performing services on a reduced schedule, wages paid to the employee are only treated as qualified wages if they exceed what the employee would have otherwise been paid for the services performed. In that case, employers will receive a credit for the difference between the total wages paid to the employee and the amount the employer would have paid for the reduced hours or services actually provided by the employee.
The tax credit may be claimed against the employer portion of employment taxes, including Social Security and Railroad Retirement payroll taxes. To the extent the credit exceeds the employer portion of employment taxes due, the credit is treated as an overpayment and is refundable to the employer.
The IRS has issued a new Form 7200 to claim those credits.
An Eligible Employer may receive both the tax credits for the qualified leave wages under the FFCRA and ERC under the CARES Act, but not for the same wages. The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
An Eligible Employer that receives a paycheck protection loan cannot claim Employee Retention Credits.
Note: The IRS issued additional guidance for employers who paid qualified wages between March 13, 2020, and March 31, 2020. The employee retention credit for 50 percent of those wages should be claimed together with 50 percent of any qualified wages paid during the second quarter of 2020 on your second quarter Form 941, 941-SS, or 941-PR. Do not include the credit on your first quarter Form 941, 941-SS, or 941-PR.
This blog post provided by member Matthews, Carter & Boyce.