In the second part of our payroll tax series we will look at the Employee Retention Credit (ERC).
The ERC is a new tax credit allowed under the CARES Act. The credit is available for businesses that are closed, partially closed, or experiencing significant revenue losses as a result of COVID-19.
Businesses and tax-exempt organizations (excluding federal, state, and local governments and their agencies and instrumentalities) may be eligible.
To be eligible for the ERC an employer must fall into one of two categories:
The employer’s business is fully or partially suspended by government order due to COVID-19 during the calendar quarter, or
The employer has a significant decline in gross receipts, defined as gross receipts that are below 50% of the receipts for the same quarter in 2019, beginning with the first quarter of 2020. Eligibility ends on the first day of the quarter following the quarter when gross receipts exceed 80% compared to those in the same quarter of 2019. The eligibility period cannot extend beyond December 31, 2020.
If an employer has 100 or fewer employees, the credit is based on qualified wages paid to all employees regardless if they worked or not.
If an employer has more than 100 employees, the credit is limited to qualified wages paid to employees for the time that they are not providing services.
Qualified wages paid by an eligible employer include wages paid from 3/13/2020 to 12/31/2020 and include related qualified health plan expenses. The credit is equal to 50% of qualified wages up to $10,000 per employee (maximum credit is $5,000 per employee).
The employer cannot use the same wages for the ERC and the FFCRA sick/family leave credits.
The recently passed Paycheck Protection Program (PPP) Flexibility Act left unchanged the portion of the law that states that an employer who obtains a PPP loan is ineligible for the ERC. The two are still mutually exclusive and businesses may not apply for one if they use the other.
The ERC may be obtained through payroll tax deposit reduction, the new IRS Form 7200 or Forms 941 beginning in the second quarter of 2020. Form 941 will now include a reconciliation of the credit allowed and the reductions taken. Although the credit must be taken in the applicable quarter, it does appear that IRS will allow an amended Form 941-X to be filed to claim any credits previously overlooked.
Regardless of whether you process your payroll in-house or use a payroll provider, we want to help you receive the credits that you are eligible for. Please give us a call for more information.