Originally, the Employee Retention Credit was intended to encourage companies to retain staff they might otherwise lay off or furlough during government-imposed shutdowns. However, even if a business remained open during the pandemic or is reopening now as restrictions ease, it still may qualify for the credit under certain conditions.
How the Credit Works
The employee retention credit is a refundable and advanceable credit against the 6.2 percent Social Security payroll tax that employers must pay to match their employees’ Social Security payroll deductions. The goal of the credit is to help companies keep employees on the payroll, but because it is both refundable and advanceable, it also can help generate cash flow relief in the short term.
Eligible companies may claim a credit equal to 50 percent of the “qualified wages” they pay to employees between March 13, 2020 and the end of the year, up to a maximum credit of $5,000 per employee. The definition of “qualified wages” and the amounts allowed as a credit depend on whether the employer averaged more or fewer than 100 full-time employees during 2019. The term “qualified wages” also includes certain health plan costs for both working and furloughed employees.
Qualifying for the Credit
If quarterly gross receipts decline by more than 50 percent when compared to the same quarter last year, companies may continue to claim the credit until their quarterly revenues recover to at least 80 percent of their year-ago level or until they reach the $5,000 per employee maximum.
Note that businesses that received a loan under the Paycheck Protection Program (PPP) may not claim this credit. However, a business that received and then subsequently returned a PPP loan is eligible.
There are some other limitations to the credit as well. For example, employers cannot claim the credit for the same wages that are covered by other tax credit programs, such as the paid sick leave or emergency family leave credits under the Families First Coronavirus Relief Act. Wages paid to family members or to any individual who owns more than 50 percent of the business are also ineligible for the credit. In addition, any amount allowed as a credit is not deductible on the employer’s federal income tax return.
Claiming the Credit
While the Paycheck Protection Program required businesses to undertake an application and approval process in order to qualify, the credit can be claimed via the quarterly employment tax return with the revised Form 941.
While the Paycheck Protection Program proved essential for businesses retaining employees during the shutdown, not all companies were able to take advantage. For those companies or companies that have paid back their PPP loan, the CARES Act’s Employee Retention Credit provides an additional avenue to improve cash flow while maintaining payroll.
Dembo Jones’ team is eager to share their insight about these and other ways to best take advantage of CARES Act provisions.