With the month of June coming to a close next week, it is important for non-government employers to claim the maximum employee retention credits available to them right now.
In general, non-government employers who do not have a Payroll Protection Program (PPP) loan and have experienced 1) a suspension or partial suspension of their operations due to a government order limiting travel, commerce or group meetings due to COVID-19, or 2) a significant decline in gross receipts during a calendar quarter, are eligible for a tax credit of up to $5,000 per employee.
Credit for qualifying wages paid since March 13, 2020 can be claimed on the second quarter employment tax return (Form 941) due July 31, 2020. If a credit is not claimed for wages paid in the 1st or 2nd quarter that qualify for the credit, an amended employment tax return will be required. Compiling the required information now and including on an originally filed return will eliminate the need for an amended return.
Many factors determine whether an employer qualifies for the credit and how much that credit can be.
Does the Employer Have a Paycheck Protection Program Loan?
PPP loans are only available to employers with fewer than 500 employees, taking into account related entities as required, or those meeting certain tangible net worth and taxable income requirements. If any member of the controlled group of the employer has a PPP loan, then no member of the controlled group is eligible for the employee retention credit.
Some employers obtained a loan, but then determined that they did not qualify and repaid the loan by May 18, 2020. Those employers that returned the PPP loan timely can be eligible for the employee retention credit.
What Constitutes a Suspension or Partial Suspension?
In determining whether a business’ operations are fully or partially suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19, an employer must take into account 1) the manner in which the government order affects an employer’s business operations and 2) the period of time during which the government order for the business’ jurisdiction is in place. The order must be from a government that has jurisdiction over the employer’s operations.
Examples of governmental orders include an order from a mayor closing all non-essential businesses for a specified time, a state shelter-in-place order for a specified time for all workers other than those employed by an essential business, and a government curfew on residents that affects the operating hours of a business. Businesses that can operate by requiring employees to telework are not considered to have a suspension of operations, even if the government order requires the employer to close the workplace.
What is a Significant Decline in Gross Receipts?
An employer is considered to have a significant decline in gross receipts for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than 50 percent of gross receipts from the same calendar quarter in 2019 and ending with the earlier of January 1, 2021, or the first calendar quarter after the quarter for which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019.
What are Qualified Wages?
Wages paid to an employee after March 12, 2020, and before January 1, 2021 that are subject to Medicare tax and are paid during a period in which the employer had its business operations fully or partially suspended due to a governmental order or a quarter in which the employer experiences a significant decline in gross receipts are eligible for the credit. Qualified wages are increased by the employer’s and the employees’ pre-tax share of group health plan costs incurred during the same period of eligibility. The maximum amount of qualified swages and health plan costs cannot exceed $10,000 per employee.
For employers averaging 100 or fewer full-time employees in 2019, all qualifying wages paid during any period in which the business operations are fully or partially suspended due to a governmental order or any quarter the business is experiencing a significant decline in gross receipts are eligible for the credit.
If an employer averaged more than 100 full-time employees in 2019, qualified wages are only amounts paid when an employee is not providing services due to the full or partial suspension of the business or during a quarter in which there is a significant decline in gross receipts. The payment of PTO, vacation pay or sick pay is not considered wages paid when the employee is not providing services.
- If an employee’s wages are maintained, but their working hours are reduced, the payment for the hours that are not worked can be used to support a retention credit. It is important to track wages paid for hours not worked, as that is the basis of the credit.
- Qualified wages cannot exceed what the employee would have been paid during the 30 days immediately before the full or partial suspension of operations or the first day of the calendar quarter in which the employer experienced a significant decline in gross receipts.
Qualified wages do not include:
- Wages paid in accordance with mandated paid FMLA and mandated paid sick leave, which are eligible for credits under the Families First Coronavirus Response Act,
- Wages for which the employer is claiming a credit for paid family medical leave under IRC 45S,
- Wages for which the employer is claiming a Worker Opportunity Tax Credit,
- Compensation paid to former employees such as severance payments, or
- Wages paid to related parties.
How Does an Employer Claim the Employee Retention Credit?
An employer claims the employee retention credit by reducing its payroll tax deposits and reconciling the qualifying wages and credits claimed on the quarterly Form 941. If tax deposits are not sufficient to fund the credit, employers can file Form 7200 requesting an advance payment of the credit.
Employers using a third-party payer (e.g., a Professional Employer Organization or a reporting agent) are entitled to the credit for wages paid their common law employees. The third-party payer is not eligible for the credit.
Any credits paid for wages paid during the first quarter of 2020 should be claimed on the second quarter 2020 Form 941. Employers deferring payment of the employer share of Social Security wage tax (OASDI, 6.2% of wages up to $137,700 for 2020) should first reduce their employment tax deposits by the tax deferral amount and then reduce the tax deposits for the employee retention credit and the credit for mandated paid FMLA and sick leave.
May Employers Deduct Wages Eligible for the Employer Retention Credit?
Employers receiving an employee retention credit cannot deduct the portion of the wages paid, including the allocable health care costs, equal to the credit for federal income tax purposes. Neither the portion of the credit that reduces the employer’s applicable employment taxes, nor the refundable portion of the credit, is included in the employer’s gross income.
Coordinating with a Payroll Provider
If your organization utilizes a third-party payroll provider for the filing of your payroll tax returns, it is recommended that you provide advance notice to the provider of your desire to claim the retention tax credit. Businesses should also notify the provider of the desire to refund any overpaid tax from the quarterly return or to carry it forward to future returns. Ask the following questions of your third-party provider to understand their process to help you claim the credit:
- When is the deadline for the employer to provide retention credit qualifying wages to the payroll provider for inclusion on the 2nd quarter return?
- If the payroll tax deposits were not remitted by the payroll provider to the IRS, but were drawn from the employer’s bank account for payment to the IRS, when and how will amounts be returned to the employer?
Finally, if the employer filed Form(s) 7200 during the quarter for advance refunds of the employee retention credit, provide copies of the form(s) to the payroll provider to assist with reconciling all wages, credits and tax payments.
Cherry Bekaert is available to assist in evaluating your maximum credit and in properly documenting the credit.
