Businesses Have Until End of 2020 to Take Advantage of Employee Retention Credit
Businesses trying to offset the financial disruption caused by the COVID-19 pandemic in 2020 still have time to take advantage of the employee retention credit. This credit is available to eligible employers who retained employees during the crisis and can be claimed on wages paid to employees through Dec. 31, 2020.
However, any business that took a Paycheck Protection Program (PPP) loan cannot claim this credit, regardless of how much of their loan was forgiven.
What is the Employee Retention Credit?
This credit — a provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act — can be claimed against 50 percent of wages paid per quarter, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020. Essentially, the maximum credit is $5,000 per employee (50% of $10,000) for the year.
What Employers Qualify for the Employee Retention Credit?
Most employers, including tax exempt organizations, can qualify for the credit if they did not take a PPP loan. Self-employment income, household employers, and government employers do not qualify. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
Some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify.
- Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
- Businesses shuttered but able to continue their operations largely intact through telework. However, any of these businesses still may qualify for the credit with the second factor test.
- An employer that has a significant decline in gross receipts.
- Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify. They are no longer eligible if in the calendar quarter immediately following their quarter gross receipts exceed 80% compared to the same calendar quarter in 2019.
An employer can amend their Form 941 if they determine later that they qualified for the credit.
If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not yet in business. Note: A member of controlled or affiliated service groups are considered a single employer, so they must aggregate their gross receipts to determine when and if they qualify.
The IRS has provided FAQs to flesh-out how the credit works for employers. This guidance is only informational and not legal authority.
What wages qualify when calculating the retention credit?
Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses qualify when calculating the employee retention credit. These must have been paid after March 12, 2020 and qualify for the credit if paid through Dec. 31, 2020. When determining the qualified health expenses, the IRS has multiple ways of calculating depending on circumstances. Generally, they include the employer and employee pretax portion and not any after-tax amounts.
When determining the qualified wages that can be included, an employer must first determine the number of full-time employees (FTE) they had in 2019. Employers with more than 100 FTEs (based on the employer shared responsibility provision in the Affordable Care Act) use different qualified wages than those with 100 or fewer FTEs. For the purposes of the employee retention credit, an FTE is defined as one that in any calendar month in 2019 worked at least 30 hours per week or 130 hours in a month (this is the monthly equivalent of 30 hours per week)
- Employers who were in business the entire calendar year in 2019 would take the sum of the number of FTEs in each calendar month and divide by 12.
- An employer who started a business during 2019 determines the number of FTEs by taking the sum of the number of FTEs in each full calendar month in 2019 in which the business operated and divide by that number of months.
- An employer who started a business in 2020 determines the number of FTEs by taking the sum of the number of FTEs in each full calendar month in 2020 that the business operated and divides by that number of months.
Note: The FTE calculation used for the PPP forgiveness report is not calculated the same way as the FTE for the employee retention credit. If you are an accounting professional, do not provide your clients with the PPP Forgiveness FTE information. Also, remember that if a client has taken and will be forgiven for a PPP loan, they are not eligible for the employee retention credit. Once FTEs are determined, employers will know which qualified wages to use. Those who have more than 100 employees can only use the qualified wages of employees not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers. Basically, employers can only use this credit on employees who are not working. Employers with 100 or fewer employees can use all employee wages — those working, as well as any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act. The IRS does have guardrails in place to prevent wage increases that would count toward the credit once the employer is eligible for the employee retention credit.
- There is no double-dipping for credits. Employers who take the employee retention credit cannot take credit on those same qualified wages for paid family medical leave.
- If an employee is included for the Work Opportunity Tax Credit, they may not be included for the employee retention credit.
So, employer’s considering which credits to take should evaluate which one is better financially to their business.
How do the credits work?
The employee retention credit is allowed against the employer’s share of Social Security taxes. However, the credit is fully refundable. So, if the credit exceeds the employer’s total liability of the portion of Social Security in any calendar quarter, the excess is refunded to the employer.
At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.
How does a PEO client employer reconcile?
Employers utilizing a Professional Employer Organization (PEO) or Certified Professional Employer Organization (CPEO) do not have an individual 941 filed on their behalf, so it’s important for them to understand how they would reconcile this information and receive the credit. The IRS posted guidance to clarify how it would work.
If an eligible employer uses a PEO or CPEO, the retention credit is reported on the PEO/CPEO aggerate Form 941 and Schedule R.
If employers have questions or need more information, they should work with their accountant and payroll specialist.