Employee Retention Credit – A Second Look
May 19, 2020
SC&H’s Key Takeaways
- Eligible employers may take a 50% tax credit on up to $10,000 in qualifying wages per employee
- The employee retention credit is fully refundable
- Employers of any size may be an eligible employer
- Qualifying wages include health plan costs paid for furloughed employees
- Employers receiving and keeping a Paycheck Protection Plan loan are not eligible for the credit
The Coronavirus Aid, Relief and Economic Security (“CARES”) Act includes several significant provisions to encourage employers to retain and continue paying their employees. One of these provisions is the employee retention credit. Since the passage of the CARES Act on March 27th, the IRS has issued over 90 FAQs (frequently asked questions) providing some additional insight and clarity on the employee retention credit. With this information, it is worth a second look at this credit and whether your business can qualify for this credit.
For the most recent list of FAQs, click here.
What is the employee retention credit?
The employee retention credit (“ERC”) is a fully refundable tax credit established under the CARES Act for eligible employers. The credit equals 50% of the qualified wages paid to employees after March 12, 2020 and ending before January 1, 2021. The maximum amount of qualified wages per employee is $10,000 resulting in a maximum credit of $5,000 per employee for the year. The credit is applied against the employer’s portion of social security payroll taxes.
Who should be looking into the ERC?
- Employers who did not or could not obtain a PPP loan.
- Eligible employers whose businesses met the definition regarding negative impacts from COVID-19.
- Employers who continue to pay employee wages and/or health plan expenses during the crisis who seek immediate cash relief.
Who is an eligible employer?
Employers must meet one of two criteria to be considered an eligible employer. (1) The employer’s operations must be fully or partially suspended during the calendar quarter as a result of orders from an appropriate government authority due to COVID 19; or (2) the employer’s gross receipts for the quarter are 50% less than the gross receipts for the same quarter in the prior year.
Full or Partial Suspension of Operations
An employer’s operations are considered fully or partially suspended during a calendar quarter if an official government order limits commerce, travel, or group meetings due to COVID-19. Examples of government orders include a governor’s order that non-essential business must close for a specified period; a state’s emergency proclamation that residents shelter in place; or a county executive’s order limiting the operating hours of a trade or business.
Employers are not considered impacted by government orders if the employer is able to continue operations comparable to its operations prior to the closure. For example, if employees can telework in a comparable manner, operations are not considered fully or partially suspended.
Essential businesses may be considered partially or fully suspended if a governmental order causes its suppliers to suspend operations which results in the essential business not having access to critical goods or materials.
Employers may operate in multiple jurisdictions. Some jurisdictions may have governmental orders partially or fully suspending the employer’s operations in that jurisdiction while other jurisdictions may not have such orders. An employer may follow the same policy for all jurisdictions if the policy complies with the local government order, the Center for Disease Control and Prevention recommendations and the Department of Homeland Security guidance. The employer will be considered a qualified employer in all jurisdictions. In contrast, an employer that voluntarily suspends operations is not eligible for the credit under this criterion but may qualify under the second criteria, the substantial decrease in cash receipts.
Substantial Decrease in Cash Receipts
An employer has a significant decline in gross receipts in the first calendar quarter in 2020 when the employer’s gross receipts are less than 50% of the its gross receipts for the same calendar quarter in 2019. An employer continues to qualify under this criterion until the first quarter after its gross receipts are greater than 80% of the same calendar quarter in 2019 or with the first quarter in 2021.
The ERC is available to businesses of any size. Non-profit organizations exempt under Internal Revenue Code §501(c) are eligible for the credit. Self-employed individuals are not able to claim the credit on their earnings but can claim the credit to the extent they pay employees W-2 wages and otherwise qualify for the credit as an employer.
Businesses and non-profit organizations (or their affiliates) that obtained a Paycheck Protection Program loan under the CARES Act are not eligible employers. All entities that are members of a controlled group of corporations or a group of entities under common control are considered a single employer for all purposes of the ERC.
What are qualified wages?
Qualified wages for the credit depend on the size of the employer. Qualified wages for eligible employers that averaged more than 100 full-time employees in 2019 are wages, including health plan costs, paid to employees for not working during the applicable period. Qualified wages for eligible employers that averaged 100 or less full-time employees are all wages, including health plan costs, paid to employees during the applicable period.
The IRS has provided a detailed rule describing how to calculate the number of full-time employees in 2019. An employee who averages 30 hours of service a week or 130 hours of service in a month are considered a full-time employee for that month.
How to Calculate
- For Employers operating a business for all of 2019: Take the sum of the total number of full-time employees in each calendar month and divide by 12.
- For Employers who began business in 2019: Take the sum of the total number of full-time employees in each month and divide by the number of months in business. An employer must aggregate employees with all related entities to determine when the employer has more than 100 employees.
Qualified health plan costs are the costs paid by an eligible employer to maintain a group health plan to the extent that these amounts are excluded from the employee’s gross income. Qualified health plan costs include the cost paid by the eligible employer and the cost paid by the employee with pre-tax dollars. For employers with 100 or less employees, all qualified health plan costs paid during the applicable period are considered qualified wages. For employers with more than 100 employees, qualified health plan costs allocated to the time the employees are not working are considered qualified wages
An eligible employer who sponsors a fully insured group health plan or a self-insured group plan may use any reasonable method to allocate health plan expenses to qualified wages. A reasonable method includes the COBRA applicable premium for the employee typically available from the insurer or administrator.
The IRS just ruled, after pressure from Congress, that applicable employers who have furloughed employees but continue to pay their health plan costs during the applicable period can treat these costs as qualified wages.
Qualified wages for an employee cannot exceed the amount paid to the employee for working the same duration during the 30-day period preceding the applicable period. Of important note, wages paid to related individuals of the employer are not considered qualified wages.
Qualified wages also do not include any wages that the employer received a credit for as qualified sick or family leave wages, paid family leave wages or the Work Opportunity Tax Credit.
How does an employer claim the Employee Tax Credit?
An employer claims the ERC on Form 941 for the applicable quarter. The credit reduces the employer’s portion of social security taxes. An employer may receive a refund if the credit exceeds the federal employment taxes the eligible employer owes. The eligible employer may reduce its employment tax deposits during the quarter for the ERC amount. The credit amount may be used to reduce all employment withholding payments including the employer’s share of social security and Medicare taxes, the employee’s share of social security and Medicare tax withholding and the employee’s federal income tax withholding. By reducing its employment tax deposits, employers may receive an immediate cash benefit under the ERC.
An eligible employer may receive an advance of the ERC to fund the payment of qualifying wages if the federal employment taxes are not enough to cover the qualifying wage payments. To receive the advance payments, the qualified employee should file Form 7200, Advance Payment to Employer Credits to COVID-19.
Employee Retention Credits for the first quarter of 2020 are claimed on the second quarter 2020 Form 941.
If you have any questions on any part of the Employee Retention Credit, please reach out to us directly through our website.