The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is a massive stimulus package that became law on March 27, 2020. In total, the bill provides roughly $2 trillion, making it the largest economic stimulus bill in U.S. history. One noteworthy provision for small businesses involves a refundable employment tax credit for employers, known as the Employee Retention Credit (ERC). This credit is available to qualifying businesses that are experiencing a severe downturn in business, or that must suspend operations entirely under state and local public health orders.
Employee Retention Credit
Section 2301 of the CARES Act establishes the ERC. This tax credit is available for wages paid between March 12, 2020 and January 1, 2021.
Amount of Wages
Employers may take the credit against the Social Security portion of payroll taxes in an amount equal to fifty percent of wages, up to a maximum of $10,000 per employee. The maximum tax credit is therefore $5,000 per employee. If an employer ordinarily pays an employee $1,500 per week, the available tax credit for that week is $750.
The credit is only available for wages that are equal to or less than the wages received by the employee during the preceding thirty-day period. If the employee described above receives wages of $2,000 one week, the employer would only be able to claim a tax credit on their usual wages of $1,500.
The ERC is a refundable credit, meaning that if the amount of the credit exceeds the amount of payroll tax that an employer must pay to Social Security, the IRS will “refund” the difference to the employer. According to the IRS, employers can reduce the amount of payroll taxes they submit with their quarterly Form 941 by the amount of the credit. If an employer is due a refund, they can submit Form 7200.
Eligibility for the Tax Credit
The ERC is available to any employer, regardless of the number of employees. To qualify, an employer must have been actively engaged in business in 2020, and must now be experiencing economic hardship due to the coronavirus pandemic.
Section 2301 establishes two standards for economic hardship. An employer must have either:
1. “Fully or partially suspended” its business operations because of a government order related to the coronavirus; or
2. Experienced a drop in gross receipts during a calendar quarter of fifty percent or more, as compared to the same quarter in 2019.
For businesses in the first group, the credit may be available to them for each quarter they must remain closed. Businesses in the second group may continue to use the credit until a quarter in which gross revenues exceed eighty percent of those in the prior year’s quarter. Either way, the credit expires at the beginning of 2021.
Employers with More than 100 Employees
An additional requirement applies to larger employers. In order to qualify for the ERC for a particular employee, that employee must not be “providing services” to the employer because of a government-ordered business closure or a loss of business income. This is meant to incentivize larger employers to continue paying employees.
Exceptions to Eligibility
Two groups of employers are not eligible for the ERC:
1. The federal government, and state and local governments; and
2. Recipients of express loans under the CARES Act’s temporary amendments to the Small Business Act.
If you have questions about a tax-related issue, please contact the tax advisors at the Enterprise Consultants Group today online or at (800) 575-9284 to see how we can help you.