Many small business owners were caught flat-footed when the Payroll Protection Program Loan (PPP Loan) was launched in late March 2020. The rush that followed the PPP Loan announcements nearly brought the operations in some of the largest US banks to its knees as they tried to decipher the new SBA lending program and how exactly to respond to the overwhelming amount of small business owners’ applications.
Despite having more than $600 Billion in paycheck protection funds available through the SBA Loan program, many small business owners did not gain access to these emergency funds meant to keep their employees on the payroll.
Due to the wide media coverage over the availability of PPP Loans, the subsequent funding drought, and the numerous complexities involved in obtaining these loans, many business owners overlooked a different way to recover employee payroll costs if their business had been mandated to shut down by a governing authority or if their revenue had plummeted due to the Covid-19 pandemic.
The Employee Retention Credit, under the CARES Act Section 2301, offers a viable and alternative way to recover payroll costs for any type of employer, except state and local government entities, regardless of their size.
But before we get into the nuts and bolts of the Employee Retention Credit (ERC), here is a quick overview of what this post covers:
- How Much Can I Recover with the ERC Tax Credit?
- Is my Business or Organization Eligible for the ERC Payroll Tax Credit?
- How Do I Apply for the Employee Retention Credit?
- Can I Get an Advance for the Employee Retention Credit now?
- How Does the ERC differ from the Paycheck Protection Program?
- Will Other CARES Act Programs Cause my Business to Not Qualify for the ERC?
How Much Can I Recover with the ERC Tax Credit?
The amount a business owner can recover is dependent on three things:
- The number of employees on the payroll during the 2020 quarter vs. that same quarter in 2019; and
- The gross wages paid to each employee during the quarter when business operations were suspended by a government mandate or the employer’s gross receipts were less than 50% of its gross receipts for the same calendar quarter in 2019; and
- The group health care costs paid for each employee during the quarter when business operations were suspended by a government mandate or the employer’s gross receipts were less than 50% of its gross receipts for the same calendar quarter in 2019.
To compute how much an employer may recover for each employee, businesses with 100 or less employees on the payroll in 2019 should add total wages and their group health care costs (up to a maximum of $10,000 per employee) paid during the current quarter (2020), then multiply that sum by 50%.
For businesses with more than 100 employees on the payroll in 2019, the computation is the same as described above, except the wage and group health care costs used are those amounts paid to employees who are NOT actively providing services because operations have been suspended or are due to the decline in gross receipts.
Regardless of the number of business’ employees, if the business is eligible to apply for the Employee Retention Credit, the maximum amount of credit per employee will be $5,000 in 2020.
Is my Business or Organization Eligible for the ERC Payroll Tax Credit?
Unlike the Paycheck Protection Program Loans, any employer is eligible for the tax credit if they operate a trade or business during the calendar year 2020 and face either of the following two scenarios:
- The operation of their trade or business was suspended (partially or fully) during the calendar quarter because of a governmental order that limited commerce, travel, or group meetings due to Covid-19;
- The operation suffered a significant decline in gross receipts of 50% or more during the 2020 calendar quarter when compared to the same calendar quarter in 2019. At the point when gross receipts exceed 80% during the 2020 calendar quarter compared to the same calendar quarter in 2019, it will be the last quarter in which the employer will be eligible for ERC payroll tax credit.
For example, if in 2019 your business had 12 employees and was forced to remain closed anytime during the second quarter of 2020 due to a government mandated Covid-19 closure or the business’ gross revenue in the second quarter of 2020 fell below 50% of the gross revenue in the second quarter of 2019, the business is eligible for the ERC for the second quarter of 2020.
How Do I Apply for the Employee Retention Credit?
To apply for the ERC, the employer files its quarterly federal form 941 beginning in the second quarter of 2020. This tax return is due on July 31, 2020.
The form will be amended to allow the employer to take the credit against the employer and employee’s share of Social Security and Medicare taxes and the Federal Income Taxes withheld from the employee’s paychecks.
It’s not clear how an employer is expected to adjust its payroll withholdings payments associated with the payroll taxes deposit rules during a given quarter when neither the quarter’s gross receipts nor its employees’ gross payroll costs are known. Hopefully, the IRS will shed some light on how this is to be achieved without subjecting the employer to underpaid or late-paid payroll withholding tax penalties and interest.
Can I Get an Advance for the Employee Retention Credit now?
The IRS issued a federal form 7200 to allow employers to request an advance of the ERC.
Federal form 7200 is intended for employers to file who expect their ERC to exceed the payroll tax payments they normally are required to deposit. This form may be filed by the employer multiple times during a given quarter if the situation warrants.
How Does the ERC differ from the Paycheck Protection Program?
The Employee Retention Credit differs from the PPP Loan in several ways:
- The ERC is not a Loan. It is a tax credit and is the employer’s money to keep.
- Applying for the ERC is a matter of completing the federal form 941 and possibly the federal form 7200 if the tax credit exceeds the normal amount of federal payroll tax deposits.
- The SBA and its SBA authorized lender are not involved. You don’t have to chum up to your banker (or find one who will return your call)!
- There are no ‘forgiveness’ calculations to do or to worry about.
- The Employee Retention Credit is only available to employers who have been forced to suspend or close their doors by a governing mandate or who have lost at least one half of the revenue when compared to the previous quarter in 2019.
- There is no limit to the number of employees eligible for the ERC.
Will Other CARES Act Programs Cause my Business to Not Qualify for the ERC?
If your business already received Covid-19 pandemic financial relief in the form of the PPP Loan, your business is not eligible for the ERC. If it were, your business would be double-dipping and that’s not what the CARES Act intends.
Several other types of wages paid to employees are excluded from the computation of the ERC eligible wages and those include:
- Wages which the employer received a tax credit for paid sick and family leave
- Any wages paid to employees under the Work Opportunity Tax Credit
- Wages paid under the family and medical leave provisions under IRC Section 45S (FMLA).
If an employer missed the PPP Loan application window or simply does not want to go to the trouble of applying for a Loan and subsequently filing for loan forgiveness, the Employee Retention Credit may be a very good option to offset some of its pandemic payroll costs.
As an alternative to the PPP Loan, if the employer is able to confirm its doors were shuttered by governing mandate or its revenue has been severely reduced due to the pandemic, employers should consider applying for the payroll tax credit.