Everything You Need to Know About the Employee Retention Credit

Overview and links to jump to an individual section:

• What is the Employee Retention Credit?
• Deferral of the employer share of Social Security taxes
• Payroll advance mechanism through Form 7200
• Net Loss carry-forward

An overview of the Employee Retention Credit

What is the Employee Retention Credit?

• A refundable tax credit for up to 50% of the total wages paid to employees during the closure.
  
• The maximum you can receive is $10,000 of wages ($5,000 of credits) per employee
  
• This applies to all wages from March 13, 2020 to December 31, 2020. Meaning, you can take up to $5,000 in credits per eligible employee until the end of 2020.

Can I use this if I will receive/have received a PPP loan or FFCRA reimbursement?

• If you received a loan through the Paycheck Protection Program, whether or not any portion of that loan is forgiven, you’ll be unable to claim the Employee Retention Credit.
• The FFCRA is not to be included in the ERC reimbursement for calculation of tax credit. The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA. 

Am I eligible for the Employee Retention Credit?

• The operation of your trade or business is fully or partially suspended 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

• Your gross receipts “significantly decline” and are less than 50% of your gross receipts for the corresponding quarter in 2019
  • A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019.  The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.

Example:

What is the maximum that I can self-reimburse with the Employee Retention Credit?

The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter.  The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.

How does a qualified employer fund payroll payments of qualified wages?

In anticipation of receiving the credits, Eligible Employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.

An Eligible Employer that pays qualified wages to its employees in a calendar quarter before it is required to deposit federal employment taxes with the IRS for that quarter may reduce the amount of federal employment taxes it deposits for that quarter by half of the amount of the qualified wages paid in that calendar quarter.  The Eligible Employer must account for the reduction in deposits on Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

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:

• the Eligible Employer paid qualified wages to its employees in the calendar quarter before the required deposit,
• the amount of federal employment taxes that the 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 the Eligible Employer’s anticipated Employee Retention Credit for the qualified wages for the calendar quarter as of the time of the required deposit, and

• the 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. 

What are “Qualified Wages”? (Which employee costs can I recover?)

• Qualified wages are wages (as defined in section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in section 3231(e) of the Code) paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.
• Average of 100 or fewer employees; If you had an average of 100 or fewer employees, you can claim any “Qualified Wages” paid to an employee, working or not, during the closure.
• Average of more than 100 employees; If you had an average of more than 100 employees, you can claim any “Qualified Wages” paid to employees who are not working due to the closure.
• If your wages include the employer portion of group health care costs, you may include these expenses in the qualified wages. For the purposes of the credit, you may include this expense in the calculation of the qualified wages.
• Eligible Employers may claim the Employee Retention Credit for qualified wages that they pay after March 12, 2020, and before January 1, 2021. Therefore, an Eligible Employer may be able to claim the credit for qualified wages paid as early as March 13, 2020.

Which employee costs are not reimbursable?

• If you received a credit from other wage credits, such as one’s found under the FFCRA, you may not include those paid leave credits as qualified wages in your totals for the Employee Retention Credit.
• You can’t include wages for any employee’s wages from claims to Work Opportunity Tax Credit or other claims paid from the family and medical leave credit under Section 45S of the Internal Revenue Code.

Deferral of the Employer share of Social Security taxes

Under the CARES Act, you may be able to defer your payment of the employer share of the Social Security taxes.

What amount of Social Security taxes can I defer under the CARES act?

• An employer is allowed to defer 6.2% of wages up to the Social Security ceiling that accrue from March 27, 2020 through, and including, December 31, 2020. 
• 50% of the deferred Social Security taxes are due by December 31, 2021, with the remainder due by December 31, 2022.
• The deferral of Social Security taxes is not available for taxes that are due to be deposited after you receive debt forgiveness under the Paycheck Protection Program. If you received loan forgiveness through the Paycheck Protection Program, you’ll be unable to defer the employer share of 2020 Social Security taxes for any deposits due after the date of the loan forgiveness.
• If you have any taxes that were due to be deposited on or prior to the date of the loan forgiveness, you can continue to defer these tax payments until the applicable payment dates in 2021 and 2022.
• Check with your payroll provider for taxes that have been withdrawn from your account but not paid yet. Typical practice for payroll providers is to deduct all taxes due, including social security taxes at the time the payroll is disbursed to employees. However, these funds are typically held and not paid until the employer’s due date, which could be weekly, monthly or quarterly. Policies vary with provides of this service, so it is best to acheck with them directly regarding their policy.

Payroll Advance mechanism through the filing of Form 7200

• Because quarterly returns are not filed until after qualified wages are paid, some Eligible Employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their qualified wages.  Accordingly, the IRS has established a procedure for obtaining an advance of the refundable credits.  
• The Eligible Employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount.  If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the Eligible Employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
• If an Eligible Employer fully reduces its required deposits of federal employment taxes otherwise due on wages paid in the same calendar quarter to its employees in anticipation of receiving the credits, and it has not paid qualified wages in excess of this amount, it should not file the Form 7200.  If it files the Form 7200, it will need to reconcile this advance credit and its deposits with the qualified wages on Form 941 (or other applicable federal employment tax return such as Form 944 or Form CT-1), and it may have an underpayment of federal employment taxes for the quarter.

Net Loss Carry-forward

• 2018 tax law changes: Currently the law eliminated losses from being carried-backward – only carry-forward against future taxable income. A special provision for the coronavirus situation is the reinstatement of the previous provision which allows loss carry-back for up to 5 years
• This provision is applicable to all entities, from C-Corp, S-Corps, LLCs, etc..
• The major benefit is that businesses can recover taxes paid in prior years. Carry-forward losses can help offset taxable income in the future, but future gains are uncertain.

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