12.15.20 | Vision 2020
Due to COVID-19, a number of different payroll tax credits were established to help provide economic relief to employers. For eligible employers that did not receive a Paycheck Protection Program (PPP) loan, the Employee Retention Credit may provide much needed relief to eligible businesses. An important provision of the Coronavirus Aid Relief and Economic Security (CARES) Act, the Employee Retention Credit is a refundable federal payroll tax credit equal to 50% of up to $10,000 of qualified wages paid to employees ($5,000 credit maximum per employee) after March 12, 2020 and before January 1, 2021. The credit is available to all employers whose operations were fully or partially suspended during a 2020 calendar quarter due to governmental orders limiting commerce, travel, or group meetings due to COVID-19. The credit can also be claimed by employers that have experienced a greater than 50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding 2019 calendar quarter.
What are Qualified Wages?
Defining qualified wages depends on the average number of full-time employees (FTEs) employed by an eligible employer during 2019. Wages paid to an employee that are subject to Medicare tax and paid by employers meeting the criteria above, after March 12, 2020 and before January 1, 2021, are eligible for the credit.
Eligible Employers with 100 or fewer FTEs
For an eligible employer that averaged 100 or FTEs in 2019, qualified wages include all wages paid to any employee during any period in the calendar quarter in which the business operations were fully or partially suspended due to a governmental order or any calendar quarter the business experienced a significant decline in gross receipts.
Eligible Employers with more than 100 FTEs
For eligible employers that averaged more than 100 FTEs in 2019, qualified wages are limited to the wages paid to an employee for time the employee is not providing services due to either a full or partial suspension of operations by government order or a significant decline in gross receipts. In addition, qualified wages paid to an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the commencement of the full or partial suspension of operations.
Qualified Wage Exclusions
If an eligible employer averaged more than 100 FTEs in 2019, the employer may not treat qualified wages as amounts paid to employees for paid time off (PTO) for vacations, holidays, sick days, and other days off. Payments are considered qualified wages only if the payments are made to an employee who continues to be employed by the eligible employer. Severance pay in connection with a former employee’s termination would also not be considered qualified wages as this is payment for the past employment relationship and therefore not attributable to the time for which the credit may be claimed. Other exclusions from qualified wages include related payroll taxes and withholdings, wages for which the employer received a credit for qualified sick or family leave, and wages paid to an employee for purposes of the Work Opportunity Tax Credit or the credit for paid family medical leave.
Claiming the Credit
Eligible employers will report their total qualified wages for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. Form 941 is used to report income, Social Security, and Medicare taxes withheld by the employer from employee wages, as well as the employer’s share of Social Security and Medicare tax. Wages paid between March 13 and 31 should be reported on the Q2 941 for purposes of the Employee Retention Credit this year. It is possible that a company could file its Form 941 before it is able to calculate if there is a significant decline in gross receipts in a quarter. In that case, the employer should file a form 941-X, amended quarterly payroll tax filing, to claim the credit.
Form 941 has recently been expanded to allow for reporting and reconciliation of the payroll tax credits created by the CARES Act and other federal legislation related to COVID-19. This revised form will now be more than three pages long and will be used for the remaining 2020 quarterly reporting period. Form 941 has an additional worksheet where calculations for the Employee Retention Credit will be performed. The Form will reconcile what the tax amount would have been, how much the employer retained, and determine if any additional credit is owed to the employer.
As circumstances change and additional details about the credit are released, employers may determine if they were entitled to claim the Employee Retention Credit in a prior quarter, but failed to claim it on their previously filed Form 941. If this happens, employers may file an amended payroll tax return using Form 941-X to claim a refund for such prior quarter. The instructions include a worksheet which can be used to help report the Q1 and Q2 employee retention credits. For some employers the Employee Retention Credit may provide some much-needed relief as their businesses recover. The credit is not subject to a specific time period like the PPP, but may apply to wages paid through the end of the year.
Questions: Contact Hal Zemel at 212.331.7684 | email@example.com or reach out to your Berdon advisor.
Berdon LLP New York Accountants