May 1, 2020
- Organizations which did not receive a loan under the Paycheck Protection Program may be eligible for payroll relief under the CARES Act Employee Retention Credit program.
- The Employee Retention Credit program offers eligible employers a fully refundable tax credit equal to 50% of qualified wages paid in a calendar quarter, up to a maximum credit per employee of $5,000 for all quarters combined.
- Eligible employers can receive the tax relief in one of three ways, including by reducing their tax deposits, requesting an advance credit, or by seeking a refund on the employer’s quarterly tax return.
For organizations which did not receive a loan under the Paycheck Protection Program, payroll relief may be available under the Employee Retention Credit program established in Sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Below are key definitions used by the program, followed by a summary of program highlights, in question and answer format.
The Employee Retention Credit program offers eligible employers a fully refundable tax credit equal to 50% of qualified wages paid in a calendar quarter. The maximum amount of qualified wages taken into account for each employee for all calendar quarters combined is $10,000, making the maximum credit per employee $5,000. The employer takes the credit each quarter until it utilizes the entire $5,000 amount for each employee. It could be fully utilized in the first quarter of reporting or continue into the next quarter. It depends upon the amount of earnings for each employee. [ix]
In general, organizations are eligible for this relief if they answer “yes” to these three questions:
1. Did the organization operate as a trade or business, including a tax-exempt organization, during 2020? [x]
2. Did the organization experience either:
1. A Period of Significant Decline in Gross receipts, or
2. Period of Suspension in Operations
due to coronavirus and the related response measures? [xi]
3. Did the organization not receive a Paycheck Protection Program loan? [xii]
There are some limitations to an organization’s eligibility. [xiii]
- It appears that an organization’s eligibility to take the Employee Retention Credit ends when it fully resumes operations and its gross receipts increase above 80% of its gross receipts for the same quarter in 2019. An organization should continue to monitor its eligibility as circumstances change.
- Any wages taken into account in determining the employee retention credit shall not be taken into account for purposes of determining the payroll tax credits for paid sick and paid family and medical leave. [xiv]
- An employer cannot include the wages of an employee if the employer takes a work opportunity credit. [xv] The work opportunity credit is available to employers that hire employees from certain targeted groups who have consistently faced significant barriers to employment. This would give these employers a double benefit.
- Although this restriction does not impact nonprofit organizations, practitioners should be aware that the employee retention credit is not available to federal, state, or local government employers. [xvi]
- For all organizations, eligibility ends on December 31, 2020.
For each full-time employee, the maximum amount the organization can receive for all quarters combined is the lesser of $5,000 or 50% of qualified wages up to the limit of $10,000.
Employers are required to withhold federal income taxes and the employees’ share of social security and Medicare taxes. In addition, employers are required to pay a portion of the social security and Medicare taxes. The employees’ and employers’ portions of the taxes and withholdings are required to be deposited, and the employers file an employment tax return to report this to the IRS.
Most employers will report the information for the employee retention credit on the IRS Form 941 and account for any its deposits or any reductions. [xvii] It is likely the IRS will issue a new Form 941 for the second quarter of 2020 since the Form 941 for the first quarter does not easily accommodate the reporting of the payroll tax credits.
According to IRS guidance, there are a few methods through which the employer can receive the relief.
1. The eligible employer can file its employment tax return, which will be Form 941 for most employers, and seek a refund. However, this is not the quickest way to get relief.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of social security tax but the excess is refundable under normal procedures. [xviii]
“…the Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes the eligible employer owes. That is, if for any calendar quarter the amount of the credit the eligible employer is entitled to exceeds the employer portion of the social security tax on all wages paid to all employees, then the excess is treated as an overpayment and refunded to the employer… Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the employment tax return and the amount of any remaining excess will be reflected as an overpayment on the return..” and offset certain outstanding tax liabilities “prior to being refunded to the employer.”[xix]
In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act. [xx]
3. If an employer anticipates that its employee retention credit will exceed the amount of the employment taxes it has retained, the employers can seek an advance credit by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19, with the IRS. This is filed by faxing it to the fax number listed in the instructions to the form.
Form 7200 can be filed at any time before the end of the month following the quarter in which the qualified wages were paid, which is the date the Form 941 would be due. If necessary, Form 7200 can be filed several times during each quarter. However, Form 7200 cannot be used to request an advance payment for an anticipated credit if the employer has already reduced its deposits.
In the IRS guidance it states:
If you paid any qualified wages between March 13, 2020 and March 31, 2020, inclusive, you will include 50% of those wages together with 50% of any qualified wages paid during the second quarter of 2020 on your second quarter Form 941…, to claim the employee retention credit. Do not include the credit on your first quarter Form 941…” [xxi]
Employers that file Form 941…may file Form 7200 to request an advance payment of the tax credit for qualified sick and family leave wages and the employee retention credit. You will need to reconcile any advance credit payments and reduced deposits on your employment tax return(s) that you will file for 2020. No employer is required to file Form 7200. …Instead of filing Form 7200, you should first reduce your employment tax deposits to account for the credits. You can request the amount of the credit that exceeds your reduced deposits by filing Form 7200 or waiting to get a refund when you claim the credits on your employment tax return.” [xxii]
An employer that qualifies and has decided to take the employee retention credit might consider reducing the employment taxes currently. In addition, if any employment taxes have already been deposited and would be eligible for the employee retention credit, the employer might consider filing Form 7200 to receive the advance credit rather than waiting for the refund that would occur when the payroll tax returns are filed one month after the end of the quarter.
In the instructions to Form 7200, Advance Payment of Employer Credits Due to COVID-19, the IRS states “the employment taxes that are available for these credits include withheld federal income tax, the employee share of social security and Medicare taxes, and the employer share of social security and Medicare taxes with respect to all employees. If there aren’t sufficient employment taxes to cover the cost of…the employee retention credit, employers can file Form 7200 to request an advance payment from the IRS.”
The IRS is allowing the employer to utilize all of the employment taxes and withholding to pay the employer for the employee retention credit. This seems like a quick method to get money to the employer since it already has the money in its possession.
In addition, the IRS will pay the employer any portion of the employee retention credit that exceeds the employment taxes and withholding. Presumably, the IRS will treat the employment taxes and withholding as having been paid, and the employees can report their withholding when they file their individual income tax returns. The IRS has indicated that it will continue to update its guidance.
Ordinarily, failing to set aside the required amount of employment tax deposits is penalized under Internal Revenue Code (the “IRC”) Sec. 6656, Failure to make deposit of taxes. However, guidance from the IRS states that an employer will not be subject to this penalty if: [xxiii]
1. The employer paid qualified wages to its employees prior to the time of the required deposit.
2. The amount of employment taxes that the employer does not timely deposit, reduced by the amount of employment taxes not deposited in anticipation of the credit claimed for the other COVID-19 related payroll tax credits, is less than or equal to the amount of the employer’s anticipated credits for the employee retention credit for the calendar quarter as of the time of the required deposit, and
3. The employer did not seek payment of an advance credit by filing Form 7200.
The total maximum tax credit available per employee is $5,000. So, in general, relief under the Employee Retention Credit program will be lower than under the Paycheck Protection Program. [xxiv]
As with most of the CARES Act relief programs, many questions remain about the details of how the relief program will be administered. Additional IRS guidance is expected. In the meantime, because of this uncertainty, organizations seeking to obtain relief under this program should work closely with an experienced accountant to ensure the organization implements the program in compliance with applicable law and regulations.
This blog, And God’s First, will be updated with new posts when additional information becomes available.
[i] Ms.Wyllie is the Director of Tax Services at O’Neill, a Professional Accounting Corporation, in New Orleans Metropolitan Area. Ms. Wyllie earned her Juris Doctor from Loyola University and her LL.M. degree in taxation from Georgetown University Law Center.
[ii] PublicLaw No: 116-136 § 2301(c)(3); Note: Section 2301 (c)(3)(B) “For an employer whose average number of FTEs is greater than 100, “qualified wages paid or incurred with respect to an employee…may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.” In other words, the employer cannot increase the employee’s wages in order to get a higher credit.
[iii] PublicLaw No: 116-136 § Section 2301 (c)(3)(C)(i).
[iv] IRC § 4980H(c)(2)(A).
[v] IRC § 4980H(c)(2)(E).
[vi] PublicLaw No: 116-136 § 2301(m).
[vii] PublicLaw No: 116-136 § 2301(c)(2).
[ix] PublicLaw No: 116-136 § 2301(a) and (b)(1).
[xi] PublicLaw No: 116-136 § 2301(c)(2).
[xiii] PublicLaw No: 116-136 § 2301(h).
[xiv] PublicLaw No: 116-136 § 2301(b)(2) and PublicLaw No. 116-127 §§ 7001 and 7003. (“Families First Act”).
[xv] PublicLaw No: 116-136 § 2301(h)(1).
[xvi] PublicLaw No: 116-136 § 2301(f).
[xviii] https://www.irs.gov/coronavirus/employee-retention-credit updated 4/7/2020.
[xix] https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-actupdated 4/10/2020.
[xx] https://www.irs.gov/coronavirus/employee-retention-credit updated 4/7/2020.
[xiii] IRS Notice 2020-22.
[xiv] PublicLaw No: 116-136 § 1106(a)(3).