Employee Retention Tax Credit (CARES Sec 2301)
Employee Retention Tax Credit - The Bill creates an employee retention credit for certain “eligible employers” with closures or significant sales disruption due to the COVID-19 pandemic.
The provision allows for a refundable credit against employer payroll taxes (Social Security 6.2%) for each calendar quarter equal to 50% of qualified wages paid after March 12, 2020 through December 31, 2020, up to $10,000 in qualified wages, for each employee ($5,000 maximum credit.)
“Eligible employers” - were carrying on a trade or business during 2020 and either
Suspended operations - Were required to fully or partially suspend operations as a result of orders from an appropriate governmental authority due to the COVID-19 outbreak, or had
Significant decline in receipts - Gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year. According to the IRS, receipts include total sales (less returns and allowances) and income from services provided. Receipts also include interest, dividends, rents and royalties and sale of assets (reduced by the basis of such assets).
To be considered a Suspended operation, an employer must meet ALL 3 tests:
1. The orders have to come from the federal government, or a state or local government that has jurisdiction over the business;
2. The orders have to limit commerce, travel, or group meetings due to COVID-19; and
3. The orders must affect an employer’s operation of its trade or business.
Employers with >500 employees and nonprofit (501c) are eligible for this program. Self-employed individuals are NOT eligible.
For employers with more than 100 full-time employees (based on 2019 average FTEs), only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit.
If an employer has less than 100 employees, all employees are eligible for the credit.
If you started business in 2020, use your average FTE’s for 2020. Add up FTE’s for each month and then divide by the number of months you were in business for 2020.
The IRS will not require a business to wait until it files its payroll tax return to claim the credits. Instead, the business may reduce its current payroll tax obligation by the amount of the anticipated credits.
This particular credit is refundable; meaning if it exceeds the employer’s share of Social Security tax, the excess is returned to you in cash by filing IRS Form 7200. The IRS will allow the credits to reduce not only the employer’s AND the employees’ share of both Social Security and Medicare, but also the employees’ federal income tax withholding.
Qualified wages basically include salaries, other compensation, and benefits, as well as qualified health plan expenses. Any wages taken under the FFCRA (Families First Act) are excluded.
First and foremost, the MAXIMUM amount of wages you can take into account for ANY ONE EMPLOYEE for the ENTIRE year is $10,000. Once you have paid an employee $10,000 in qualified wages, you are tapped out at a $5,000 credit.
You can increase the wages paid to an employee by the employee’s allocable share of certain health care costs.
If you terminate an employee and pay severance, those are NOT qualified wages.
If you have more than 100 FTEs, payments made for any pre-existing accrued vacation, sick time, or other personal leave wages are not qualified wages, as they were “accrued” at a time when the employee was providing services.
Wages paid to a related individual – or in the case of a corporate employer, someone related to the majority owner of the corporation – are not eligible wages.
Any qualified family leave or sick leave wages paid pursuant to the Family First Coronavirus Relief Act are NOT eligible wages.
Wages paid to an employee may not exceed the amount such employee would have been paid for working for the 30 days immediately preceding the impacted time period.
Recipients of the Paycheck Protection Program (PPP) loan (CARES Sec 1102) are NOT eligible to receive this credit.
Eric Glymph Financial Strategist / Founder EDGe Business Planning www.EDGeBusinessPlanning.com 804-833-1792