Businesses across the country are struggling because of the economic downturn associated with the coronavirus pandemic. Congress has provided a variety of economic stimuli, including the Employee Retention Credit (ERC). This is a payroll tax credit found in § 2301 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The CARES Act is the largest stimulus package in the nation’s history, providing around $2 trillion in direct payments, loans, grants, and tax credits.
What Is the Employee Retention Credit?
The ERC is a fully-refundable payroll tax credit that gives businesses affected by the pandemic an incentive to keep employees on their payroll. The credit applies to the employer’s share of the Social Security portion of payroll taxes under the Federal Insurance Contributions Act (FICA).
What Businesses Are Eligible for the Employee Retention Credit?
The ERC is available to most businesses that meet the CARES Act’s criteria regarding economic impact from the coronavirus.
No Limit on Number of Employees
The ERC is not limited by minimum or maximum numbers of employees, although the number of employee does affect the calculation of the credit:
– If an employer has more than one hundred employees, the credit is based only on wages paid to furloughed employees.
– If an employer has no more than one hundred employees, they may include all employee wages, regardless of whether they are still working.
Exclusions from Eligibility
The federal government and state and local governments are not eligible for the ERC. Self-employed individuals may not claim the credit for their own self-employment income. Small businesses that took loans from the Small Business Administration under the Paycheck Protection Program (PPP) are also excluded from eligibility.
How Can My Business Qualify for the Employee Retention Credit?
In order to qualify for the credit, a business must show that it is or was engaged in business in the calendar year 2020, and that it has experienced financial hardship during a calendar quarter in 2020. The statute establishes two categories of financial hardship:
– Suspension of Business Due to COVID-19: A business had to “fully or partially suspend” its operations “due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings” in order to fight the coronavirus pandemic.
– “Significant Decline in Gross Receipts”: During a quarter in 2020, a business’ gross receipts are less than half of its gross receipts for the corresponding quarter in 2019. The ERC is available to the business until its gross receipts exceed eighty percent of its receipts from the corresponding prior year quarter.
How Much Is the Credit?
The ERC is equal to fifty percent of the “qualified wages” paid to employees during the calendar quarter, up to $10,000 per employee. The meaning of the term “qualified wages” depends on the total number of employees during the quarter, as mentioned above. Smaller employers may include the wages of all employees, while larger employers may only include those who are furloughed.
When Will I Receive the Credit?
If the amount of the credit is more than an employer owes in FICA tax for a quarter, the IRS will refund the balance. The employer reports these amounts when they file their quarterly Form 941. The IRS has also provided Form 7200 for businesses to request an advance on the credit.
The tax advisors at Enterprise Consultants Group are available to help you with your payroll tax-related questions and concerns. Please contact us today online or at (800) 575-9284 to discuss your case with a member of our team.