Published: April 22nd, 2020 at 8:12 AM PST | Updated: May 15th, 2020 at 10:22 AM PST
For more up-to-date information on the Employee Retention Credit, please refer to our ERC FAQ. We provide timely updates as the IRS releases additional guidance.
For employers that were not eligible or able to obtain a Paycheck Protection Program (PPP) loan, economic relief is still available. Enter, the Employee Retention Credit (ERC).
The ERC is one of several significant tax provisions included in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress in March.
Significantly, the ERC intends to achieve two critical objectives: 1) provide immediate cash-flow relief to eligible companies, regardless of size, impacted by the COVID-19 pandemic, and 2) encourage employers to keep employees on their payroll.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable payroll tax credit equal to 50% of qualified wages paid by eligible employers to certain employees after March 12, 2020 and through December 31, 2020. The maximum amount of qualified wages per employee is $10,000, which comes out to a maximum refundable credit of $5,000 per employee.
Eligible employers (including tax-exempt entities described in IRC § 501(c)) are those who experience:
- Full or partial suspension of operations as a result of a COVID-19 government order; or
- A greater than 50% reduction in quarterly gross receipts, measured on a year-over-year basis, due to COVID-19.
PPP loan borrowers and self-employed individuals are not eligible employers for the purpose of the ERC.
Qualified wages are wages and compensation paid to an eligible employee between March 13, 2020 and December 31, 2020. This also includes the employer’s qualified health plan expenses. For additional qualified wage calculation rules, please see below.
How do you calculate your ERC amount?
Calculating qualified wages
Your ERC amount is calculated each calendar quarter and your qualified wages depend on how many Full-Time Employee Equivalents (FTEEs) you have. Here are some simple rules to follow:
- For eligible employers with an average of 100 or fewer FTEEs during 2019, your qualified wages are the equivalent of 100% of the gross wages paid to your employees.
- For eligible employers with an average of more than 100 FTEEs during 2019, your qualified wages equal only that portion of compensation paid to employees who are not providing services (e.g., paid even though they are not working or working at a reduced capacity/utilization).
- Compensation paid to employees who are only paid for hours actually worked or services actually rendered does not constitute qualified wages.
Keep in mind that calculating the number of FTEEs is solely for the purpose of determining whether your qualified wages are counted based on the 100 or fewer vs. greater than 100 FTEEs formula. Your qualified wages are then calculated in respect to actual compensation paid to actual employees during the qualifying period, up to the maximum of $10,000 per employee.
For the purpose of calculating an employee’s qualified wages, gross wages cannot exceed compensation during the 30 days prior to March 12, 2020. This means employers cannot increase or accelerate the ERC max amount by giving employees raises effective after February 10, 2020.
Furthermore, you cannot claim more than one payroll tax credit against the same wages. For example, wages taken into account under the Emergency Paid Sick Leave or Emergency FMLA under the Families First Coronavirus Relief Act (FFCRA), or wages taken into account under IRC § 45S (the normal FMLA credit rules), cannot also count towards your ERC.
Individuals treated as “related individuals” under IRC §51(i)(1) do not qualify for the ERC. This includes wages paid to familial relations of the employer, or if the employer is an entity, to any individual who owns more than 50% of the entity.
For these purposes, the rules broadly define familial relations to include: lineal descendants (parent, child, grandparent, grandchild, etc.), stepparents, stepchildren, siblings, aunts, uncles, cousins, in-laws, and any other qualifying relative under IRC § 152(d). This is very important for family businesses to keep in mind, as they will need to be cautious when calculating and claiming their credit.
Another point to consider is that if the employer is allowed a Work Opportunity Tax Credit with respect to a certain employee, that employee is excluded for that period.
How do I claim the Employee Retention Credit?
This is a developing area! However, based on our discussions with various payroll servicing providers, including ADP and Paychex, they are aware of the ERC and working to implement additional functionalities on their platforms to assist employers in substantiating their eligibility and claiming the ERC on their employment tax returns.
The interim guidance presented by the Internal Revenue Service (IRS) on March 31, 2020 states the following:
- In order to claim the Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs on their 2020 quarterly employment tax returns on Form 941.
- The ERC is taken against the employer’s share of social security tax but the excess is refundable.
- Eligible employers can also request an advance by submitting Form 7200.
What is the key takeaway?
By design, the Employee Retention Credit aims to help eligible employers that have been financially impacted by the coronavirus crisis keep employees on their payroll and stimulate much needed cash flow. The credit provides immediate payroll tax relief via a fully refundable credit of up to $5,000 per employee.
You may claim an advance by reducing federal employment tax deposits and claiming advances on Form 7200, thereby allowing employers to fund qualified wages by accessing federal employment taxes for any wage payments made in the same quarter.
How can Squar Milner help?
Our team of tax experts is here to help you take advantage of the Employee Retention Credit. We can:
- Keep you up-to-date on applicable provisions regarding eligibility;
- Help you calculate your qualified wages;
- Work with your internal and/or external payroll processing service provider to confirm you are claiming the full extent of the ERC;
- Ensure you are following protocol when it comes to different nuances like excluded employees or mutually-exclusive employment tax credits;
- Help you claim your cash refund;
- Work with you to maintain the supporting documentation; and/or
- Develop strategic cash flow planning by assisting with budgeting and spending plans to balance operational needs with optimization of ERC benefits.
If you have any questions or are just looking for practical advice regarding the ERC, our expert leaders are here to assist you.
You can also check out our latest webinar on the Employee Retention Credit (ERC), found here.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.