Section 2301 of the CARES Act provides a payroll tax credit for some employers that stay open for business during 2020. For employers that are eligible the CARES Act provides a payroll tax credit of up to $5,000 per employee. The credit is equal to 50% of “qualified wages” paid to employees during a quarter, capped at $10,000 of “qualified wages.” The credit is available for wages paid from March 13 to December 31, 2020.
This credit is not limited to small employers. However, any employer who receives a Small Business Administration Loan under the Paycheck Protection Program of the CARES Act is ineligible to receive this employee retention credit.
ELIGIBLE EMPLOYERS MUST:
- Carry on a trade or business during 2020, and
- During the calendar quarter, either:
- Their operations were fully or partially suspended as a result of orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19, or
- Their gross receipts for the quarter were less than 50% of the gross receipts for the same calendar quarter in the prior year. The employer will remain eligible for the credit until such calendar quarter as their gross receipts equal 80% of the gross receipts for the same calendar quarter in 2019.
Qualified wages is dependent on the number of employees.
- Employers with less than 100 FULL-TIME employees, all wages paid to employees, regardless of whether the employees are providing services, qualify for the credit.
- Employers with 100 or more FULL-TIME employees on average during 2019 (as determined by IRC Section 4980H as enacted by the Affordable Care Act), only wages paid to employees who are not providing services qualify for the credit.
Qualified wages are based on the definition of wages used for FICA taxes, plus the amount paid by the employer for health plan expenses. Wages cannot exceed what the employee would have been paid for working an equivalent amount of time during the preceding 30 days. Meaning wage increases do NOT qualify for the employee retention credit.
The CARES Act does not explain how this limitation should be calculated, so IRS guidance would be helpful.
Any federally mandated sick or child care leave paid under the Families First Coronavirus Response Act (FFCRA) is specifically excluded from “qualified wages” for the employee retention tax credit, since employers receive a dollar-for-dollar tax credit for such paid leave wages.
The employee retention tax credit cannot be taken on the same wages as other tax credits, such as Work Opportunity Tax Credit under IRC Section 51 or Employer Credit for Paid Family and Medical Leave under IRC Section 45S.
HOW TO CLAIM CREDIT:
Claiming the employee retention credit will track the same procedures for claiming the tax credits for providing federally mandated paid sick and child care leave under FFCRA. The IRS said that employers can immediately recoup their refundable tax credits for paid sick and child care leave by reducing their total federal tax deposit amount from all employees (not just from those who are receiving wages that qualify for the credit) by the amount of eligible credit. Specifically, employers can deduct the amount of tax credit for paid sick and child care leave from:
- federal income taxes withheld from all employees’ pay;
- the employees’ share of Social Security and Medicare taxes; and
- the employer’s share of Social Security and Medicare taxes.
Likewise the IRS said that employers can follow that same process to immediately recoup their employee retention tax credit. These credits will ultimately be reconciled against the total tax liabilities when employers file their quarterly Form 941 or other employment tax returns.
In addition, the IRS has published Form 7200, Advance Payment of Employer Credits Due to COVID-19, which allows employers to request a rapid refund for both the employee retention credit and the FFCRA paid sick and child care leave tax credits. Form 7200 can be filed (by fax) to request an advance of payments at any time before the end of the month following the quarter in which the qualifying wages were paid. It can be filed multiple times during the quarter if necessary. Amounts use to offset federal tax deposits as described above should not be duplicated on a request for refund on Form 7200.
The timing of the rapid refunds is still somewhat unclear. They are supposed to be processed within two weeks after receipt of Form 7200, but the IRS's system does not yet appear to be operational and is unclear when it will ready. To maximize cash on hand, employers should compare whether they might better off offsetting their accumulated tax credits from their upcoming payroll deposits or requesting the refund on Form 7200. The result may differ for each employer, depending on their facts and circumstances.
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Mike, Katie & Marc