The “CARES Act” establishes a tax credit for employers with fewer than 100 employees. The credit is 50% of qualified wages paid to employees, capped at $10,000 in qualified wages ($5,000 maximum credit). Eligible Employers must either have fully or partially suspended their operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 or experience a significant decline in gross receipts during the calendar quarter. Employers receive the tax credit in 3 sequential methods:
- Reducing the amount of the employer’s current federal tax deposit for employee income tax withholding, employee payroll tax withholding, and employer payroll tax withholding;
- Claiming an advanced refund for the credit in excess of the employer’s federal tax deposit liability by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19;
- Receiving a tax over-payment refund when the employer files its quarterly federal payroll tax return, Form 941.
EWH PLANNING TIP:
The Employee Retention Credit will be businesses primary relief if they do not receive the PPP loan. Unfortunately, unlike the PPP loan, the Retention Credit is a reactive stimulus. Businesses will need to incur payroll before seeing any benefit. Additionally, while the PPP loan pays for all employee costs including benefits, the Retention Credit merely reimburses for federal income tax withholding, employer & employee payroll taxes, and a portion of the employee’s net check on the first $10,000 of qualified wages (credit capped at $5,000). Nonetheless, the Retention Credit will be the next best relief for businesses that will not be able to meet the FTE requirements of the PPP and wishes not to take on debt in these times.
A significant pitfall of this credit is the administration of receiving the credit. While businesses are allowed to eliminate federal tax deposits in anticipation of receiving the Retention Credit, businesses will be penalized for withholding federal tax deposits in excess of qualified credits. This reconciliation is only done quarterly with the IRS, so careful planning and communication with you and your payroll provider will be needed to successful claim this credit.