The Economic Security Act (CARES Act), enacted on March 27, 2020, provides for the use of and Employee Retention Credit (ERT). It is designed to encourage ELIGIBLE EMPLOYERS to maintainemployees on their payroll despite experiencing economic hardship related to COVID-19. Where application is appropriate, the credit is available to Employers regardless of size including tax exempt organizations.
There are only two exceptions to the Employee Retention Credit (ERT):
- State and local governments and their instrumentalities
- Small businesses who take Small Business Loans
- ERT 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. ERT applies to qualified wages paid after March 12, 2020, and before January 1, 2021.
- The maximum amount of payroll tax creditable qualified wages with respect to each employee for all calendar quarters is $10,000. As such, the maximum ERT credit available to an Eligible Employer for qualified wages paid to any employee is $5,000.
Eligible Employers are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either:
- Fully or partially suspends 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
- Experiences a significant decline in gross receipts during the calendar quarter. Meaning, the employer’s gross receipts are below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
Qualifying wages varies by number of employees in 2019
- Less than 100 Employees. If the employer had 100 or fewer employees on average in 2019, then the credit is based on wages paid to all employees whether they actually worked or not. In other words, even if the employees worked full time and got paid for full time work, the employer still gets the credit.
- Greater than 100 Employees. If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
ERT credits are fully refundable
The credits are 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. Meaning, 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 will be reflected as an overpayment on the return.
How does the ERT credit work?
Eligible Employers can be immediately reimbursed for the credit by reducing the amount of payroll taxes they have withheld from employees’ wages that they are required to deposit with the Treasury.
Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns (Form 941- Employer’s Quarterly Federal Tax Return). 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 portion of social security and Medicare tax.
ELIGIBLE EMPLOYER MAY NOT RECEIVE THE EMPLOYEE RETENTION CREDIT IF THE ELIGIBLE EMPLOYER RECEIVES A SMALL BUSINESS INTERRUPTION LOAN UNDER THE PAYCHECK PROTECTION PROGRAM
An Eligible Employer that receives a Paycheck Protection Loan under the CARES ACT should not claim Employee Retention Credits.
Consult your Tax Specialist to determine your best course of action.