Over the past couple months, we’ve heard much about the business relief provisions included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). One such provision, however, has largely escaped the limelight: the employee retention credit.
The employee retention credit gives employers a refundable payroll tax credit for “qualified wages” paid to retained employees from March 13 to December 31, 2020. It’s designed to incentivize businesses to keep their employees on payroll, even if they aren’t able to work. Here’s what you should know about the credit.
The employee retention credit cannot be combined with a Paycheck Protection Program loan or the work opportunity credit.
This is important to know right off the bat: If you received a Small Business Interruption Loan under the Paycheck Protection Program (PPP), you are ineligible for this credit. Also, you cannot “double dip” with the work opportunity credit and employer retention credit on the same employee.
What exactly does the employee retention credit provide?
The employee retention credit provides a refundable credit of 50% of up to $10,000 in qualified wages per full-time employee for all eligible calendar quarters between March 31 and December 31, 2020. In other words, you can get up to $5,000 for each employee you retain from Q2 to Q4 this year.
What are “qualified wages?”
The definition of qualified wages for the purposes of this credit are based on Social Security Wages (Box 3 wages on Form W-2) plus the allocated share of health insurance expenses. The wages used for the Employee Retention Credit can’t exceed the amount employee was paid in the prior 30 day period.
Health insurance expenses that are eligible to be counted as “qualified wages” for the credit include the cost of health insurance paid by the employer and the portion of cost of health insurance paid by the employee with pre-tax contributions. Health plan costs paid for furloughed employees are also “qualified wages.”
- Companies with more than 100 full-time employees: You can only claim wages for employees you retain who are not working due to the effects of the COVID-19 pandemic.
- Fewer than 100 full-time employees: You can claim wages for all employees, regardless of if they’re working or not.
Again, the credit applies only against wages paid and the allocated share of health insurance expenses, so if you laid off your staff you would likely not qualify. However, if you hired employees back, and you were still under shutdown or your gross receipts were diminished, you could still qualify.
How do employers qualify for the employee retention credit?
There are two ways you can qualify for the employee retention credit:
- You must have experienced a full or partial shutdown of your business by government decree. An example of this could be a restaurant that was ordered to limit its service to delivery, takeout, or curbside pickup. It’s worth noting that essential businesses, such as grocery stores and gas stations, would not qualify under this method.
- You experienced a “significant decline in gross receipts.” Per the CARES Act, this is defined as gross receipts that fell below 50% of the same calendar quarter in 2019. For instance, your second quarter (ending June 30) gross receipts were $100,000 in 2019 and $25,000 in 2020.
If you qualify under the “gross receipt” test, you would continue to qualify as long as your gross receipts stay below 80% of what you recorded for the same quarter in 2019.
How do you calculate a “significant decline in gross receipts?”
To determine if you’ve experienced a significant decline in gross receipts as defined above, you would need to look at your gross receipts for each calendar quarter in 2020. The first calendar quarter in which your gross receipts tally less than 50% of your receipts for the same quarter in 2019 is when you would have first experienced it.
If you have experienced a significant decline in gross receipts, there are a few things you need to do. First, look at gross receipts during later calendar quarters of 2020 to see if any are greater than 80% of the same quarter in 2019. If so, the following calendar quarter would mark the end of your significant decline in gross receipts. However, if your gross receipts remain below the 80% threshold for the remainder of 2020, your significant decline in gross receipts would end with the first calendar quarter of 2021.
How do employers apply for the credit?
Assuming you’re eligible for the employee retention credit, the easiest way to apply is via your Form 941. This form has been redesigned as of Q2 to account for the credit. If you qualify for the credit and request a refund of your payroll taxes, you’d likely see the credit amount show up in your bank account within two weeks. It’s possible to get an advanced credit using Form 7200.
When should you act?
The employee retention credit applies to this year’s quarters ending in June, September, and December. Although it’s possible Congress may extend the program, it’s set to expire on December 31.
If you think you could be eligible for the employee retention credit, it’s important to act sooner than later to make the most of this relief provision. If you have questions about the credit or your eligibility, we’re here to help. Your PWB CPA can guide you through the benefits you can expect and answer any questions you have.