The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established several new programs to encourage businesses to keep employees on their payroll during the economic downturn caused by the Coronavirus (COVID-19) pandemic. The PPP Loan program (Paycheck Protection Program) has received the most publicity and hundreds of thousands of businesses have applied for PPP loans. However, the CARES Act also created a new tax credit for businesses that maintain their employee payrolls: The Employee Retention Credit. For many businesses (especially those with less than 100 employees), this credit can be as good or better than a PPP loan, and it is much easier to obtain. Moreover, unlike PPP Loans whose funding is limited, there is no limit on how many employers may claim the credit.
The credit is available to all private employers (including nonprofits) that have experienced an economic hardship in 2020 due to the Coronavirus (COVID-19) pandemic. This includes any business:
However, businesses that obtain PPP loans cannot also obtain the employee retention credit. It’s also not available to the self-employed, since you must have employees to qualify. Household employers also can’t get the credit, since they are not in business.
The employee retention tax credit is equal 50% of up to $10,000 in qualified wages paid to full-time employees during all eligible calendar quarters beginning March 13 and ending December 31, 2020. An eligible calendar quarter is one in which the employer experiences economic hardship as defined above. Thus, the maximum credit is $5,000 per employee.
Example: ABC, Inc. pays Brian $8,000 in wages during the second quarter of 2020 (April through June) and $8,000 during the third quarter (July through September). ABC qualifies for an employee retention credit of $4,000 for the second quarter (50% of what Brian was paid) and $1,000 for the third quarter. The $5,000 credit is now maxed out for Brian.
Qualified wages include the cost of employer-provided health care.
The employee retention credit is designed to encourage employers to keep employees on the payroll even if they are not working due to the Coronavirus pandemic. For employers who averaged more than 100 full-time employees in 2019, the credit may only be claimed for wages paid to employees for time they did not work. However, if a business had 100 or less full-time employees on average in 2019, the credit is based on wages paid to all employees, regardless of whether they worked or not. This makes the credit much more attractive for smaller employers with less than 100 full-time employees.
One of the best things about the employee retention credit is that it is easy to claim. There is no need to file an application with a bank as with a PPP loan and wait for it to be approved and funded. Instead, starting in the second calendar quarter of 2020, employers can immediately claim the credit by reducing by the amount of their employer share of Social Security taxes--a 7.65% tax on employee wages. Ordinarily, employers must pay these taxes every quarter. This reduction should be accounted for in the quarterly employment tax return filed by the employer, usually IRS Form 941, Employer’s Quarterly Federal Tax Return.
Example: ABC, Inc. paid $10,000 in qualified wages during the second quarter of 2020 and is therefore entitled to a $5,000 employee retention credit. ABC may keep up to $5,000 of the employer Social Security taxes it was going to deposit with the IRS. It will not be charged a penalty for doing so. ABC will claim the credit when it files Form 941 with the IRS by April 30, 2020.
If an employer does not owe enough Social Security taxes to cover the amount of the credit, it may request an advance payment of the credit from the IRS by faxing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19. The employee retention credit is a refundable credit; thus, the employer may collect the full amount from the IRS even if it reduces its tax liability below zero.