Employee Retention Credit May be a Better Option

Businesses may want to consider the Employee Retention Credit in place of Paycheck Protection Program UPDATED 5/12/2020

While a lot of attention has been given to the Paycheck Protection Program, less has been directed to the Employee Retention Credit (ERC). The Cares Act provision provides eligible businesses with a credit against the employer’s share of social security taxes. If you did not receive a PPP loan, or if you returned a PPP loan by the newly extended May 18th deadline (originally May 7th), this credit may be right for you.

Business Eligibility

Businesses eligible for the credit include:

  • Those whose business has been fully or partially suspended during any calendar quarter due to orders from a governmental authority due to COVID-19, or
  • Those that have experienced a significant decline in gross receipts during the calendar quarter.
  • Self-employed individuals to the extent they have employees and tax exempt organizations are eligible for the credit.
  • Businesses NOT eligible include:
  • Those ordered closed, but were able to continue operations (i.e. via telework) similar to how they operated prior to shutting their offices (businesses may only be eligible if there is a significant decline in revenues)
  • Those that received a Paycheck Protection Program loan
  • Self-employed individuals without employees

How to Determine Decline in Gross Receipts

Determining a significant decline in gross receipts is measured on a quarterly basis.
It starts with the first calendar quarter after 12/31/19 for which gross receipts for the calendar quarter are less than 50% of the gross receipts for the same calendar quarter in 2019 and ends with the earlier of

  • January 1, 2021; or
  • The calendar quarter for which gross receipts are greater than 80% of gross receipts for the same prior year calendar quarter of 2019.

ERC Value

The ERC is equal to 50% of wages (including qualified health plan expenses) paid after March 12, 2020 and before January 1, 2021 up to $10,000 per employee. The maximum credit is $5,000 per employee.

Wages not eligible for the credit include:

  • Amounts paid to employees under the mandatory paid sick leave and paid family leave where a credit has been taken
  • Wages paid to related parties
  • Wages paid for pre-existing vacation time, holidays and sick time (for employers with over 100 employees)
  • Wages paid to employees that continue to work (for employers with over 100 employees)
  • Wages paid to an employee at a higher rate than paid within the last 30 days.
  • Wages exempt from social security and Medicare taxes
  • Wages eligible for the work opportunity tax credit
  • Self-employment income

Wages to consider are based on the size of the employer.

  • If the employer has over 100 employees, the wages to consider are those paid to employees not providing services because the business was fully or partially suspended, or the gross receipts were as described above.
  • If the employer has fewer than 100 employees, all wages are considered for the specified time period.

The wage deduction is reduced by the credit.

Health Care Expenses

Health care expenses are also eligible for the ERC. They include the employer portion and the employees’ pre-tax contribution for health care expenses. The health care expenses are allocated to each employee and are considered part of the $10,000 limit.

Health care expenses paid by employers with 100 or fewer full time employees for employees laid off or furloughed who are not getting paid are eligible for the credit. Health care expenses paid by employers with more than 100 full time employees are treated as wages but only for those who are receiving wages and not providing services.

Health care expenses include:

  • Health insurance and employer contributions to a health reimbursement arrangement (HRA) and, or
  • Health flexible spending account payments (FSA).
  • Health care expenses do NOT include:
  • Health care expenses for which a credit was taken as part of the qualified sick leave and qualified family leave
  • Employer contributions to a health savings account (HSA)

ERC Form

The credit can be taken using Form 941. If the credit exceeds employment taxes, Form 7200 should be filed to accelerate the refund. Form 7200 can be faxed to 855-248-0552.

More Information

Please visit the IRS website for frequently asked questions regarding the Employee Retention Credit, or contact us at 401-831-0200.

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