As COVID-19 continues to impact the United States, the federal government is taking action to ease the burden on taxpayers. Most recently, Congress passed a massive stimulus package that was signed into law by the President. The stimulus bill (also called the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act) has several moving pieces for taxpayers, including those stimulus checks for taxpayers. But the law also offers some provisions intended to combat rising unemployment: 6.6 million Americans filed for unemployment benefits last week.
One of those provisions is the Employee Retention Credit or ERC. It’s found in the CARES Act in Section 2301. The ERC is designed to help businesses keep employees on payroll.
The credit is available to employers, no matter the size of the business. Unlike some of the other relief, there is no cap on the number of employees. The average number of employees in 2019 will, however, affect how the credit is calculated. If you have more than 100 full-time employees, you would include wages paid to employees when they are not providing services due to a government order related to COVID-19. If you have 100 or fewer full-time employees, all employee wages qualify for the credit, even if the employee is not providing services.
Most employers are eligible for this relief, including corporations, LLCs, S corporations, partnerships, and sole proprietors who pay wages. But there are three significant exceptions:
- State and local governments (and their agents) are not eligible for the credit;
- Self-employed individuals are not eligible for the credit for their self-employment services or earnings; and
- Small businesses that take out a Small Business Interruption Loan (SBIL) under the Paycheck Protection Program (PPP) are not eligible for the credit. I’ve seen a lot of questions about this to be clear, the language in the Act says that “If an eligible employer receives a covered loan under paragraph (36) of section 7a) of the Small Business Act (15 USC 636a)), as added by section 1102 of this Act, such employer shall not be eligible for the credit under this section.” So, no double-dipping: if you take out a SBIL under the PPP, you don’t qualify for the ERC (try saying that three times quickly).
To qualify, employers must fall into one of two categories:
- Your business is wholly or partially suspended by government order due to COVID-19 (like a stay-at-home or non-essential business order) during the quarter; or
- Your gross receipts for 2020 are below 50% of the comparable quarter in 2019.
The ERC is calculated each calendar quarter for wages paid after March 12, 2020, and before January 1, 2021. That means, the ERC is generally available for quarters 2, 3, and 4 for the 2020 year (and part of quarter 1). However, once your numbers creep back above 80% of receipts compared to the same quarter a year ago, you will no longer qualify after the end of that quarter (but you can still claim the ERC for that quarter).
The amount of the credit is 50% of qualifying wages paid up to $10,000 per employee for all quarters. So, if you pay your employee $6,000 in qualified wages in Q2, your available credit is $3,000. If you pay your employee an additional $6,000 in Q3, your available credit is $2,000 in Q3 (not $3,000) because of the overall limit of $10,000 on wages for all calendar quarters. Qualifying wages may not exceed $5,000 – or 50% of $10,000 – for any employee for all calendar quarters.
Wages include actual payments, as well as a portion of the cost of employer-provided health care. Qualified health plan expenses will be allocated pro- based on the number of employees and timing of benefits.
Qualified wages don’t include those wages attributed to a credit for sick or family leave. And you can’t include wages paid to employees for whom you will take a work opportunity tax credit (WOTC) during the respective quarter.
Here’s the good part: If you have qualified wages eligible for the ERC, you can reduce your required deposits of payroll taxes by the amount of the credit.
And remember: the credit is refundable. That means that you may get a refund if the amount of the credit is more than the federal employment taxes that you owe. And, so long as you meet the criteria, you do not have to repay the credit or the refunds.
If you don’t have sufficient employment taxes to cover the cost of qualified sick and family leave wages and the ERC, you can file Form 7200, Advance Payment of Employer Credits Due to COVID-19 (downloads as a PDF) to request an advance payment from the IRS. You will need to reconcile your advance credit payments and reduced deposits on your employment tax return.
You can file the form for an advance payment at any time before the end of the month following the quarter in which you paid the wages. That means, if necessary, you can file Form 7200 several times during each quarter.
I know it sounds confusing, but you don’t have to file Form 7200 at all. If you can reduce your employment tax deposits to account for the credits – and don’t need an advance – you can simply reconcile your advance credit payments and reduced deposits on your employment tax return.
Also, you can’t file a corrected Form 7200. If you make an error, simply fix it when you file your respective payroll tax returns.
As with all tax matters, you’ll want to keep good records to support your credit. Keep all records of employment taxes, including any Forms 7200, for at least 4 years.
Things are happening at a rapid-fire pace these days. Keep checking back for details.