Earlier this year laws were passed to provide small businesses and their employees with relief from the financial impact of the COVID-19 pandemic. Most seem to be aware that employers receive tax credits for the paid sick and family leave required under the Families First Coronavirus Response Act (“FFCRA”). But the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) also provides a tax credit opportunity designed to encourage employee retention by giving employers a refundable tax credit for up to 50% of qualifying wages paid to employees between March 12, 2020 and January 1, 2021. If you have not already done so, now is a good time to determine if your business qualifies for the Employee Retention Credit.
Employers are eligible for the Employee Retention Credit if, for any calendar quarter in 2020, the employer has (a) fully or partially suspended operations as a result of a government order related to coronavirus, or (b) experienced a significant decline in gross receipts, meaning below 50% of the gross receipts for same calendar quarter last year. An employer cannot use the Employee Retention Credit if it has taken out a loan under the Paycheck Protection Program. Self-employed individuals and government employers are not eligible either.
The amount of the tax credit is 50% of “qualifying wages” paid to an employee up to $10,000 for all calendar quarters. This means the maximum tax credit through December 31, 2020, is $5,000 per employee. The credit reduces an employer’s liability for social security taxes. Qualified wages also include qualified health plan expenses.
Which wages are qualifying wages is based on the average number of full-time employees the employer had in 2019.
If an eligible employer averaged 100 or fewer employees in 2019, qualified wages are the wages paid to any employee during any period of a calendar quarter in which business operations are fully or partially suspended due to a governmental order or any calendar quarter the business is experiencing a significant decline in gross receipts. If an eligible employer averaged more than 100 employees in 2019, qualified wages are wages paid to employees who did not provide services during the suspension of operations or substantial decline in gross receipts. So, employers of 100 or less employees may treat all wages as qualified wages, but employers of more than 100 employees can only count wages paid to employees who were not providing services.
There are some additional rules. Paid leave under the FFCRA does not count as qualifying wages, but employers of 100 or less may count payments to employees under existing vacation, sick, holidays, and other leave policies. Larger employers do not get to include these leave payments, because they are not considered payments earned for the time the employee is not providing services. Severance payments are not qualified wages regardless of employer size, because they are payments for a past employment relationship and are not attributable to the time for which the Employee Retention Credit may be claimed.
Employers can claim the Employee Retention Credit on their federal employment tax return, typically Form 941 or 944, by reporting qualifying wages. The IRS has reissued Form 941 with instructions for claiming the Employee Retention Credit.
You can read the IRS’s answers to FAQs here.
For assistance navigating the new employee retention credit, please call Kollman & Saucier, P.A. at (410) 727-4300.