How to Claim – and See If You’re Eligible for – Employee Retention Credit
UPDATE as of May 8, 2020: If an employer repays its Paycheck Protection Program (PPP) loan by May 14, 2020, can it become eligible for the Employee Retention Credit?
Yes. An employer that applied for a PPP loan, received payment and repays the loan by May 14, 2020, will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.
However, an employer that receives a PPP loan may not receive an Employee Retention Credit if its PPP loan is forgiven and not paid.
The Employee Retention Credit, designed to encourage businesses to keep employees on their payroll as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, rolled out March 31, 2020. The IRS has issued the new form, Form 7200, Advance Payment of Employer Credits Due to COVID-19, which can be found by clicking here, and instructions, which can be found by clicking here, for employers to use to obtain advance payments of three tax credits that were created to help businesses cope with the COVID-19 pandemic:
- the qualified sick leave credit, and
- the qualified family leave wages credit; and
- the employee retention credit
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the employee retention credit and provided for advance repayment of the first two credits. The refundable employee retention tax credit is 50% of up to $10,000 in qualified wages per employee paid by an eligible employer whose business has been financially impacted by COVID-19.
If you choose to apply for an employee retention credit, here are a few facts to consider:
Does My Business Qualify to Receive the Employee Retention Credit?
If you plan to receive a U.S. Small Business Administration Paycheck Protection Program (“PPP”) loan, you are not eligible to receive the credit. However, an employer that applied for a PPP loan, received payment and repays the loan by May 14, 2020, will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer.
Your Ericksen Krentel professional can help you determine which may be the better option for your interests.
Otherwise, the credit is available to all employers regardless of size, including tax-exempt organizations. There are only two exceptions: State and local governments and their instrumentalities and small businesses who take small business loans.
Qualifying employers 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.
- 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.
These measures are calculated each calendar quarter.
How is the Credit Calculated?
The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but include a portion of the cost of employer provided health care.
How Do I Know Which Wages Qualify?
Qualifying wages are based on the average number of a business’s employees in 2019.
- Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
- Employers with more 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.
I Am an Eligible Employer. How Do I Receive My Credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Note: Employers should not include the credit on their first quarter Form 941. Eligible employers who paid qualified wages between March 13, 2020, and March 31, 2020, inclusive, will report 50% of those wages together with 50% of any qualified wages paid during April, May and June 2020 on their second quarter Form 941 (Employers Quarterly Federal Tax Return) to claim the employee retention credit.
Note on Failure to Deposit Federal Employment Taxes
An eligible employer will not be subject to a penalty under section 6656 of the Code for failing to deposit federal employment taxes relating to qualified wages in a calendar quarter if:
- An eligible employer paid qualified wages to its employees in the calendar quarter before the required deposit;
- The amount of federal employment taxes an eligible employer does not timely deposit, reduced by any amount of federal employment taxes not deposited in anticipation of the paid sick or family leave credits claimed under the FFCRA, is less than or equal to the amount of an eligible employer anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit; and
- An eligible employer did not seek payment of an advance credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, with respect to any portion of the anticipated credits it relied upon to reduce its deposits.
For more information, about the relief from the penalty for failure to deposit federal employment taxes on account of qualified wages, see Notice 2020-22.
As questions or concerns arise, we ask that you contact us so we can address them as quickly as possible to ensure we continue to meet your needs. As a reminder, you can always monitor our COVID-19 Updates webpage by clicking here for the latest or monitoring our accounts on LinkedIn, Twitter or Facebook.
About Ericksen Krentel
Ericksen Krentel CPAs and Consultants, founded in New Orleans, Louisiana in 1960 with offices in New Orleans and Mandeville, believes that serving as the clients’ most trusted adviser is grounded in going beyond the numbers.
That includes helping clients achieve their business and personal financial goals by providing innovative and exceptional services in the following areas: audit and assurance services, tax compliance and planning, outsourced CFO services and business valuations for a variety of industries; employee benefit plan audits; fraud and forensic accounting; business planning; IT consulting; loss calculations; and estate planning.
Learn more at www.ericksenkrentel.com.