As part of the recently enacted CARES Act, Eligible Employers can claim a refundable credit on their payroll tax returns of up to $5,000 per employee. In addition, employers may defer payment of the 6.2% employer portion of social security payroll taxes. However, the April 30 deadline for Form 941 has not been extended. Unfortunately, these benefits are not available to employers who receive certain benefits under the Payroll Protection Program.
Who is Eligible for the Employee Retention Credit?
Eligibility is determined for each payroll quarter. Qualifying employers qualify for one of two categories during a payroll quarter:
- The employer’s business is fully or partially suspended by a government order during the calendar quarter; or
- The employer’s gross receipts are less than 50% of gross receipts in the same quarter of 2019. Under this test, the employer remains eligible for the credit until gross receipts for a subsequent quarter are greater than 80% of the same quarter in 2019.
The following employers do not qualify, even if they meet the criteria above:
- State and local governments; and
- Employers who received loans covered by the Payroll Protection Program.
The credit does not apply to the tax on self-employment income.
How much is the credit?
The maximum credit is equal to the lesser of $5,000 or 50% of the Qualifying Wages per employee. Credits up to the maximum may be claimed in one or more quarters.
Qualifying Wages include wages and qualified health plan expenses paid after March 12, 2020 and before January 1, 2021, that are in line with the amounts paid in prior periods.
Employers with an average number of full-time employees greater than 100 in 2019 may claim a credit only for payments to employees that are not providing services for the employer. Employers who had fewer employees in 2019 may claim the credit for payments to any employee.
Wages used in calculating the credits from the Families First Coronavirus Response Act (FFCRA) qualified sick and family leave cannot be used to calculate the Employee Retention credit, but both credits could apply to the same employee.
How Does an Employer Claim the Credit?
The credit will reduce amounts otherwise due on the quarterly payroll tax return and any excess will be treated as a refund due.
However, the IRS has advised that the credit should not be claimed on the Form 941 for the first quarter of 2020 (due April 30). The credit for any Qualified Wages paid from March 13 to March 31, 2020 should be claimed on the Form 941 for the second quarter (due July 31).
In the meantime, Eligible Employers may reduce their required federal employment tax deposits based on the anticipated credits. They may also use Form 7200 to claim an advance refund of the credit.
What Taxes Can be Deferred by Employers and Self-Employed Individuals?
The 6.2% employer portion of social security taxes that would otherwise be due between March 27, 2020 and January 1, 2021 can be deferred. An equivalent amount for self-employed individuals is also eligible for deferral.
One-half of the amount deferred is due December 31, 2021. The other half is due December 31, 2022.
The deferral of payment does not extend the time to file any returns. In addition, the Employee Retention and other credits that reduce payroll taxes will reduce the amount eligible for deferral.
An Eligible Employer paid $20,000 in qualified wages, and is therefore entitled to a credit of $10,000. The employer would otherwise be required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, on wage payments made during the same calendar quarter.
The Eligible Employer has no paid sick or family leave credits under the FFCRA. The Eligible Employer can keep the entire $8,000 of taxes that the Eligible Employer was otherwise required to deposit without penalties as a portion of the credits it is otherwise entitled to claim on the Form 941. The Eligible Employer may file a request for an advance credit for the remaining $2,000 by completing Form 7200.
The credit first reduces the 6.2% employer portion of the social security tax, so that this employer has no social security tax due that requires deferral.
If you have questions or concerns regarding this Client Alert, please contact Thomas Vance at firstname.lastname@example.org or your ORBA advisor.