On March 31, 2020, the IRS issued guidance on the Employee Retention Credits under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Employee Retention Credits are fully refundable tax credits available to eligible employers equal to 50% of qualified wages paid to an employee in a particular calendar quarter. The IRS’s Employee Retention Credits FAQs can be found here.
Below is a summary of the key information from those FAQs:
An eligible employer is one which carries on a trade or business during calendar year 2020, but with respect to any calendar quarter, (a) experiences a full or partial suspension of the operation of its trade or business due to governmental order as a result of COVID-19, or (b) experiences a significant decline in gross receipts. A significant decline is deemed to occur: (1) beginning with the first calendar quarter after December 31, 2019, for which gross receipts for that calendar quarter are less than 50% of the gross receipts for the same calendar quarter of the prior year and (2) ending with the last day of the calendar quarter for which gross receipts of the employer are greater than 80% of the gross receipts for the same calendar quarter in the prior year. With respect to the gross receipts decline, aggregation rules apply, which will require certain affiliated employers to measure their gross receipts decline on an aggregated basis.
The Employee Retention Credit FAQs provide examples for what conditions might make an employer eligible for the credit. First, a restaurant or bar, for example, would be eligible for the credit under part (a) above if a state governor issues an executive order closing the restaurant or bar but allows it to continue sales through carry-out, drive-through, or delivery basis, which the IRS categorizes as a “partial suspension.” Second, an employer would be eligible for a credit in the first and second calendar quarters of 2020 under the “significant decline” element in part (b) above, if their gross receipts were $210,000, $230,000, and $250,000 in the first three calendar quarters of 2019 but declined to $100,000, $190,000, and $230,000 in the first three calendar quarters of 2020, respectively (i.e., 2020’s Q1, Q23, and Q3’s gross receipts were 48%, 83%, and 92% of 2019’s Q1, Q2, and Q3 gross receipts, respectively).
An eligible employer is entitled to a maximum credit of $5,000 per employee; this is because the maximum amount of qualified wages that may be taken into account is $10,000 (i.e., a 50% credit on $10,000 of wages is a $5,000 credit). So, for example, if an eligible employer pays $10,000 in qualified wages to an employee in Q2 of 2020, the maximum Employee Retention Credit for that particular employee is $5,000. Further, if an eligible employer pays a different employee $8,000 in qualified wages in Q2 of 2020 and $8,000 in Q3 of 2020, the employer is entitled to a $4,000 credit in Q2 of 2020, but only $1,000 in Q3 of 2020.
The IRS clarifies that what constitutes “qualified wages” depends on the number of full-time employees of the eligible employer during 2019. When determining the number of full-time employees of an eligible employer, the employer aggregation rules and full-time employee definition of the Affordable Care Act apply.
If the employer had over 100 full-time employees, then the only wages qualified are those paid to an employee for the time the employee is not providing services due to (1) a full or partial suspension due to a governmental order as a result of COVID-19, or (2) a significant decline in gross receipts (as outlined above). Such qualified wages for these bigger employers may not exceed what the employee would have been paid “for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.” For eligible employers that had 100 or less full-time employees, all wages paid to any employee during the period of economic hardship outlined in (1) or (2) immediately above are considered qualified wages.
Qualified wages are limited to wages taken into account for FICA tax purposes, as well as certain qualified health plan expenses allocable to those wages. Only qualified wages paid after March 12, 2020, and before January 1, 2021 are eligible for the credit (and those wages must also be paid within a quarter for which the credit is available).
Tax credits may be claimed for both the paid leave provided under the Families First Coronavirus Response Act and the Employee Retention provisions of the CARES Act—just not for the same wages.
Claiming the Employee Retention Credit
To be clear though, the Employee Retention Credit is voluntary, so employers, even if eligible, are not required to pay employees qualified wages. For that matter, otherwise eligible employers cannot claim both the Employee Retention Credit and the Small Business Interruption Loan under the Paycheck Protection Program under the CARES Act, so employers have to decide which program to invoke.
Eligible employers may claim the credit by reporting their total qualified wages and related credits for each calendar quarter on their federal employment tax returns—usually Form 941. Practically, an employer can reduce its federal employment tax deposit by the amount of the entitled credit to fund the payment of the qualified wages before receiving the credit. The IRS states that employers will incur no penalty for an accurate reduction in the tax deposit in anticipation of the credit for qualified wages paid; employers should be aware of the possibility of underpayment of taxes in these circumstances.
Advances of credits are available for eligible employers as well. Eligible employers wishing to claim an advance credit can file a Form 7200 “for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.” An employer should not file Form 7200, however, if it has fully reduced its required deposits with credits and has not paid qualified wages in excess of that amount.
Tax Treatment of the Employee Retention Credit
The credit is allowed to be taken against the employer-portion of the Social Security taxes under Section 3111(a) of the IRS Code (or Section 3221(a) of the RRTA for railroad employers). The IRS treats the credit as “fully refundable,” meaning it will be applied first to those Social Security taxes with any excess applied to “offset any remaining tax liability on the employment tax return” and as an overpayment subject to offset under Section 6402(a) of the IRS Code.
For more information on the Employee Retention Credit and the CARES Act as a whole, Foley’s prior summary of the Employee Retention Credit provisions in the CARES Act is available here. For more information about recommended steps, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
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