BHT&D Certified Public Accountants Blog

The CARES ACT provides employers an alternative to the Paycheck Protection Program under the Employee Retention Credit. You can only take advantage of one or the other, but not both.  

The goal of the Employee Retention Credit is to encourage employers to keep employees on payroll by offering a credit up to $5,000 per employee.

Eligible Employers

In order to be deemed an eligible employer, one must be carrying on a trade or business during the calendar year 2020 and experience either:

• a full or partial closure during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the Coronavirus disease (COVID-19) OR
• a significant decline in gross receipts

Significant Decline in Gross Receipts

In order to determine a significant decline in gross receipts the period begins with the first calendar quarter in 2020 where gross receipts are less than 50% of the same quarter in the prior year and the period ends following the first quarter where gross receipts are greater than 80% of the gross receipts for the same quarter in the prior year.

For example: The employer’s gross receipts in the table below shows a period of significant decline in gross receipts beginning 1^st quarter and ending 3^rd quarter. Although 4^th quarter is below 80%, it is not below the 50% threshold to trigger a new period to begin.

Qualified Wages

This employee retention credit is based on “qualified wages” depending on the size of the eligible employer. If an eligible employer averages 100 full-time employees or less, the wages paid to furloughed workers and employees working from home during the period of March 13, 2020 through December 31, 2020 are qualified wages. If an eligible employer averages more than 100 full-time employees, the wages paid only to furloughed workers are qualified wages. Any wages paid to employees who are working from home are not considered qualified.

In addition, any qualified wages paid or incurred for an employee may not exceed the amount that employee would have normally been paid for working during the 30 days following the period at issue.

Limitations

This credit is applicable against 50% of the qualified wages described above for each employee for each calendar quarter affected by COVID-19. The amount of qualified wages in respect to each employee cannot exceed $10,000 for all calendar quarters. Therefore, with the 50% limitation $5,000 is the maximum credit allowed for each individual employee.

All employers must also exclude any wages used in the calculation of qualified wages to determine credits due for the sick and/or family leave under the Families First Coronavirus Response Act (FFCRA) from the calculation of qualified wages used to calculate the retention credit under this provision. 

Procedure to Obtain Credit

An employer may apply the retention tax credit against the employer's share of FICA taxes. In order to obtain the benefit of this credit a business can either:

1. Reducing the payment on the Quarterly 941 to the IRS with the applicable employee retention credit
2. File a Form 7200 – Advance Payment of Employer Credits Due to COVID-19
3. A combination of #1 and #2

Under (1), the employer who has paid qualified wages to its employees before it is required to deposit the federal employment taxes with the IRS for that quarter can gain the benefit of the retention tax credit immediately by not depositing federal employment taxes due in an amount equal to up to 50% of the qualified wages for that quarter.  Not making this otherwise required deposit will be forgiven and no penalty assessed if the regulator determines that it was due to the anticipation of the retention credit. 

Under (2) and (3) above, if the business does not have any or enough federal employment taxes set aside for deposit to the IRS, the employer can seek an advance of the refundable credits.  First, the employer must exhaust any available federal employment tax deposits as addressed in (1) above.  Then, the employer can file a Form 7200 for the remaining amount of the retention credit.

If you have questions about how this might benefit your situation, please feel free to contact one of our CPAs at (616) 642-9467 or request a complimentary accounting consultation.

By: Karly Morris

Photo by:  Freeimages.com