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Is the Employee Retention Tax Credit Right For You?


***UPDATE On December 27, 2020 The Consolidated Appropriations Act of 2021  was signed in law and detailed expansions to the Employee Retention Credit (ERC).***

The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed and signed into law on March 27, 2020. If you are a business owner suffering economic hardship due to the coronavirus crisis and continuing to pay employees, you may be able to take advantage of the Employee Retention Tax Credit, a new tax provision courtesy of the CARES Act.

What is the Employee Retention Tax Credit?

Eligible employers would receive a refundable payroll tax credit equal to 50% of qualified wages paid (up to $10,000 per employee) from March 12, 2020 to December 31, 2020. The maximum credit is $5,000 per employee.

Who is an eligible employer?

An eligible employer would be a for-profit or not-for-profit organization ordered by a governmental authority to suspend or reduce business operations due to COVID-19 or had a 50% decrease in gross receipts in the current quarter compared to the same quarter of the previous year. Governmental employers are not eligible for this credit.

What are qualified wages?

Depending on your number of full-time employees currently employed, there are two ways to define qualified wages:

  • If you are a business owner with more than 100 full-time employees, qualified wages are the wages paid to an employee during the calendar quarter when the employee is not working, but not to exceed the wages that would have been paid to the employee during the 30-day period prior to when the employee was not working.
  • If you are a business owner with 100, or fewer, full-time employees, qualified wages are wages paid to all working and non-working employees during the calendar quarter.

Qualified wages also include the amount an employer pays to a group health plan attributable to the employee receiving qualified wages. However, qualified wages do not include wages that qualify for the credit for emergency paid sick leave or emergency family medical leave under the Families First Coronavirus Response Act.

How is the tax credit funded?

The tax credit is fully refundable because the eligible employer may get a refund if the amount of the credit is more than certain federal employment taxes the eligible employer owes.  That is, if for any calendar quarter the amount of the credit the eligible employer is entitled to exceeds the federal employment taxes paid to all employees, then the excess is treated as an over payment and refunded to the employer.

The eligible employer that pays qualified wages to it employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment taxes it deposits for that quarter by half of the amount of the qualified wages paid in the calendar quarter.

Alternatively, if the employer does not have enough federal employment taxes set aside, the employer can file Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to claim an advance refund for the full amount of anticipated credits.

Practically, businesses will have to work with their payroll service providers and CPAs to determine how these new credits change their existing payroll processes. Many of the large payroll service providers are still working on how to implement the new payroll credits and deferrals from the CARES Act. More details should be forthcoming in the weeks ahead.

May I take advantage of both the tax credit and an SBA loan?

Many of these new programs don’t allow you to participate in two or more programs at the same time. This credit is not available to employers who take advantage of a small business interruption loan under the paycheck protection program. Therefore, the loss of the tax credit should be taken into account in determining whether to use the paycheck protection program.

For more information on the Employee Retention Tax Credit FAQ Page on the IRS website.

Every situation is unique, and only your tax professional will be able to navigate the intricacies of this new credit and evaluate whether such a program meets the goals of your business. Please contact your CPA today to see what’s right for you.

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