Summary of Employee Retention Credit & Deferral of Payroll Taxes
4.1.20 | Client Alert – COVID-19 Update
Employee Retention Credit
Certain employers who retained employees despite a recent suspension of business operations or decline in gross receipts may be eligible to claim the refundable Employee Retention Credit for wages paid after March 12, 2020 and before January 1, 2021. The credit is applied against quarterly employment taxes with eligibility determined on a quarterly basis. If the amount of the credit exceeds the employment taxes paid for a particular quarter, the excess will be refunded to the taxpayer.
There are two mechanisms by which employers may qualify:
- Employers who in a calendar quarter in 2020 fully or partially suspended business operations due to a government order issued in response to the coronavirus (including Gov. Cuomo’s “New York State on PAUSE” executive order). Tax-exempt organizations with employees can qualify under this subsection, as well as for-profit trades or businesses.
- The credit may only be claimed in the calendar quarter(s) that an employer actually suspends its business operations due to a coronavirus-related government order.
- Employers whose experience a ‘significant decline in gross receipts’, i.e., gross receipts in a calendar quarter in 2020 that are less than 50% of gross receipts for the same calendar quarter in the prior year.
- If eligible based on a decline in gross receipts, an employer may claim the credit beginning with the first calendar quarter in 2020 that gross receipts are 50% less than gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter following the first calendar quarter that gross receipts exceed 80% of gross receipts for the same calendar quarter in the prior year.
There is no cap on the number of employees an employer may include in calculating the amount of credit. Similarly, eligibility for the credit does not depend on the quantity of employees.
Amount of Credit
The amount of the credit depends on whether, during 2019, the employer had more than 100 full time equivalent employees or not. There are rules that aggregate commonly owned employers for purposes of the 100-employee test.
For employers who employed an average number of full time employees of 100 or more in 2019, the credit amount is 50% of the wages paid to employees who, in any effected calendar quarter, are not providing services due to government mandated full or partial suspension of business or the employer’s significant decline in gross receipts. Employers of less than 100 employees in 2019 may claim the credit even if the employees continue to provide services for wages paid during the suspension of business or the applicable quarter, as the case may be.
The amount of wages which may be taken into account in computing the amount of credit generally may not exceed $10,000 for all calendar quarters. In the case of an employer with an average of over 100 full time employees during 2019, the rate of pay may not exceed that which would have been paid for working an equivalent duration during the 30 days immediately preceding the first period the employer suspended business operations or its gross receipts declined, up to $10,000 for all calendar quarters.
The amount of wages taken into account may include the employer’s expenses for maintaining and providing a group health care plan.
If the amount of credit exceeds quarterly employment taxes (reduced by certain other credits) the excess will be treated as a refundable overpayment.
An employer may not claim the Employee Retention Credit for any calendar quarter it claims the new payroll credit for paid sick and family leave, as provided by the Families First Coronavirus Response Act, or the payroll credit for paid family and medical sick leave.
If an employer is allowed the Work Opportunity Credit for wages of a particular employee, the employer may not include those wages in calculating the Employee Retention Credit.
An employer who receives a 7(a) Small Business Loan is ineligible to receive the Employee Retention Credit.
There is no explicit prohibition against claiming the Employee Retention Credit and using the deferred deadlines to pay any net employment tax due. However, the interplay of these sections is complicated, and we await further guidance.
The Secretary of the Treasury will waive penalty imposed for failure to pay employment taxes if the failure was due to reasonable anticipation of the Employee Retention Credit.
Delay of Payment of Employer Payroll Taxes
In addition to the credit described above, the CARES Act provides for a deferral of net payroll tax due for certain employers. An employer may only defer Social Security tax (6.2% of wages up to $137,700 in 2020) payments that are normally due from the period beginning on the date of enactment of the CARES Act (March 27, 2020) and ending on December 31, 2020.
Self-employed taxpayers may defer 50% of Social Security tax that would become due from the period beginning on the date of enactment (March 27, 2020) and ending on December 31, 2020.
Half of the amount of applicable deferred payroll tax will be due December 31, 2021. The remaining amount is due December 31, 2022.
A taxpayer who defers net payroll tax due is eligible for the 7(a) Small Business Loan. However, any taxpayer who had 7(a) Small Business Loan debt forgiven does not qualify for deferral of payroll tax due. A taxpayer who had 7(a) Small Business Loan debt forgiven must make employer payroll tax payments on or before the original, unadjusted quarterly deadlines.
For more information on this topic or any other matter related to the COVID-19 pandemic, please contact your Berdon Advisor.