When the CARES Act was passed in March 2020 the Employee Retention Credit was created.   This credit was created to encourage businesses to keep their employees on payroll during the Covid-19 pandemic.  The Employee Retention Credit is a refundable tax credit of 50% up to $10,000 in wages paid to each employee.  This equates to a maximum of $5,000 per employee.

 

There are two ways that an employer may be eligible for this credit, but there is one key factor that may make you ineligible to receive the credit.  If you (or an affiliated business) received a loan under the Payroll Protection Program you are ineligible to receive this credit.  

 

The first way that an employer may be eligible is that the employer experienced a full or partial shutdown of their operations during any calendar quarter in 2020 due to orders from a governmental authority in writing.  It’s important to note that if your business experienced a full or partial shutdown but your employees were working remotely, you are not considered shutdown.  This does not mean you aren’t eligible for this credit though!  If you did not experience a full or partial shutdown but your gross receipts significantly declined, you may still be eligible for the credit.

 

The second way is a significant decline in gross receipts commencing with the first quarter in which a business’ gross receipts for a calendar quarter in 2020 are less than 50% of the gross receipts from the same quarter in 2019. The decline is considered to be completed when the calendar quarter that follows the quarter when the business’s gross receipts are increased to 80% of gross receipts compared to the same calendar quarter in 2019.   In the example below you would become ineligible for credit in the third quarter.  If a business was not in operation until the third or fourth quarter of 2019, that quarter can be used as the base quarter when comparing the first and second quarter of 2020.  Based on the chart below the business had a significant decline in the first and second quarter, but not in the third quarter.

 

	2020	2019	% of Change
1st Quarter	$100,000	$210,000	48%
2nd Quarter	$190,000	$230,000	83%
3rd Quarter	$230,000	$250,000	92%

 

Once an employer determines it is eligible for the credit, they will need to determine which wages can be considered qualified.  This all depends on the number of employees a business has and eligible wages paid from March 13, 2020 through December 31, 2020.    If an employer averages more than 100 full-time employees during 2019, qualified wages are typically wages (including group health care costs) that are paid to employees for not working during the shutdown or period of significant decline in gross receipts.   Wages paid for vacations, sick pay, holidays or other days off are not qualified wages.   If an employee typically works 40 hours but the hours are reduced to 15 as a result of a shutdown or decline in revenues and the employer continues to pay the employee for 40 hours, the 25 hours the employee earns for not working are eligible for the credit.    If an employer averages less than 100 full-time employees during 2019, qualified wages are wages (including group health care costs, paid time off and holidays) that are paid to employees regardless if they are working or not.   Regardless of the number of employees a business has, wages paid for sick leave, family leave, or severance pay are not eligible for the credit,  and an employees’ pay cannot be increased to maximize the credit. 

 

After an employer concludes it is eligible to receive the credit and has paid qualifying wages to its employees, they are able to claim the credit in two ways.  The employer can file Form 941 or file Form 7200 with the IRS to request the credit in advance.  If the employer chooses not to file Form 7200 it can request the credit when they file their Form 941 for the second, third or fourth quarter of 2020.  Wages paid to employees from March 13, 2020 through March 31, 2020 are captured on the second quarter Form 941.   If an employer anticipates that it can claim the credit, it does not need to remit the payroll taxes up to the $5,000 per employee. 

If you have any questions or concerns, please contact your Faw Casson advisor.