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As an Enrolled Agent, a federally licensed tax expert, Certified Tax Planner and a Certified Tax Coach, Lynn believes in keeping taxpayers informed with the most updated information available. Please review the information that has been provided and call our office at 863-295-9895 if you have questions or need professional assistance with tax planning or any IRS or other tax matters.
Business owners, workers, taxpayers – we’re all faced with a new set of decisions, choices and options as the coronavirus epidemic continues to evolve, slow consumer spending and suspend regular business operations. Grants, Loans, Tax Credits, Tax Deferral, Stimulus Checks, Unemployment Assistance, Student Loan Relief, Health Care Coverage Changes – is your head ready to explode yet?
Small business owners are scrambling to apply for SBA emergency loans and grants created by the passage of the CARES ACT (Coronavirus Aid, Relief and Economic Security) and the FFCRA ACT (Families first Coronavirus Response Act. Among them are the Paycheck Protection Program (PPP), a loan intended to maintain employee payroll, and the Economic Injury Disaster Loan (EIDL).
Careful analysis is needed to review EACH business situation. It may be beneficial for some business owners to take a look at the Employee Retention Credit (ERC).
What is the Employee Retention Credit?
All of the various loan and grant and loan programs authorized under new legislation passed thus far in 2020 were created to encourage business owners to keep their employees on the payroll and minimize the number of workers filing for unemployment. The Employee Retention Credit (ERC) is a refundable tax credit intended to do the same, just in a different way.
Although the ERC is technically a credit against the employer’s liability for Social Security taxes on payroll, an employer does not need to wait until they actually file their quarterly payroll tax returns in order to receive the benefit of the credit. As described below, eligible employers can receive a current cash benefit either by reducing the employment tax deposits they are otherwise required to make or by filing a claim for “advance refund” (yes another new tax form has been created for this purpose).
How is the credit amount determined?
The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before Jan. 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.
Here’s are two examples: If an employer is entitled to a credit of $5,000 for qualified sick leave wages, certain related health plan expenses, and the employer’s share of Medicare tax on the leave wages and is otherwise required to deposit $8,000 in employment taxes, the employer could reduce its federal employment tax deposits by $5,000. The employer would only be required to deposit the remaining $3,000 on its next regular deposit date.
If an employer is entitled to an employee retention credit of $10,000 and was required to deposit $8,000 in employment taxes, the employer could retain the entire $8,000 of taxes as a portion of the refundable tax credit it is entitled to and file a request for an advance payment for the remaining $2,000 using the newly created IRS Form 7200.
Who is eligible for the Employee Retention Credit?
An eligible employer must “carry on a trade or business during calendar year 2020 and must meet one of two requirements:
- The operation of the employer’s business is suspended fully or partially due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
- The employer’s business experiences a decline of more than 50% in gross receipts for a calendar quarter of 2020, compared to the same calendar quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.
For example, if your gross receipts were $210,000 in Q1 of 2019 but $100,000 in Q1 of 2020, you would meet the gross receipts test because your Q1 2020 gross receipts are equal to 48% of the comparable quarter in 2019. The test for full or partial suspension due to government order applies, regardless of the revenue impact.
Who is not eligible for the ERC?
Government employers are not eligible for the Employee Retention Credit. Small businesses who take small business loans and Self-employed individuals (since they do not file payroll tax returns on their earnings) are also not eligible for the ERC.
What are qualified wages?
The Internal Revenue Code defines wages in section 3121(a). In general, “wages” refers to payment for employment, including taxable benefits. The ERC also includes, as part of wages, the portion of group health insurance plans (including both employer contributions and pre-tax employee contributions) that is allocable to otherwise qualifying wages. The determination of which wages are qualified wages depends on the average number of full-time employees employed by the eligible employer in 2019.
Qualified wages for larger employers
This is not the same level of employees used for SBA Loans. For employers that had an average of more than 100 full-time employees in 2019, qualified wages are those paid to an employee who did not work during the calendar quarter.
Qualified wages for smaller employers
For employers that had an average of fewer than 100 full-time employees in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
The period of decline in gross receipts begins with the first quarter of 2020 in which there is a more than 50% decline in gross receipts (compared to the same quarter of 2019) and ends on the last day of the first subsequent quarter in which the employer’s gross receipts are more than 80% of those for the corresponding quarter of 2019. Many small businesses have employees who “wear many hats,” and the ERC rules give businesses with fewer than 100 employees more leeway in eligibility requirements. These businesses can claim the credit for wages paid to all employees, rather than just the employees who are not working due to a closure.
What wages do not qualify for the ERC?
Qualified sick and family leave pay for which the employer is eligible for tax credits under the Families First Coronavirus Response Act are not eligible for the ERC. Wages paid to an employee with respect to whom the employer is eligible for the work opportunity tax credit for a given period also cannot be included in computing the ERC.
How can eligible employers receive the Employee Retention Credit?
If you are eligible, you can receive an Employee Retention Credit in any of three ways.
- You can claim credits on your quarterly employment tax return (Form 941), beginning with the second quarter of 2020, by reporting your total qualified wages for the quarter (the Q2 return can also include qualified wages from Q1).
- You can reduce the amount of employment taxes you are required to deposit with the IRS for each payroll cycle by the amount of the ERC to which you are entitled, without penalty.
- You can submit Form 7200 to receive an advance refund of the ERC from the IRS. You can file Form 7200 any time during a quarter and request a refund of the ERC anticipated for that quarter (less any amounts received through reduction of payroll deposits). You can file multiple times for a quarter if the amount of ERC you anticipate increases. The last date to file Form 7200 for a given quarter is the end of the month following the quarter.
Does all of this seem like it is getting VERY complicated? It is complicated. If there was ever a time when business owners should seek professional guidance regarding their payroll processes, now would certainly be a good time. This is not an area of tax law you want to be experimenting with.
Does the Employee Retention Credit work with the Paycheck Protection Program?
No, an employer is not eligible for the Employee Retention Credit if they receive a loan under the Paycheck Protection Program.
Which is better for my business, the ERC or PPP?
Both the Employee Retention Credit (ERC) and Paycheck Protection Program (PPP) are intended to keep Americans working and keep employees on payroll rather than collecting unemployment benefits. However, receiving a PPP loan renders your business ineligible for the ERC. So it’s important to weigh the pros and cons of each and make an educated decision.
Pros and cons of the Paycheck Protection Program
The Paycheck Protection Program offers small business owners loans up to $10 million to cover payroll costs and other qualifying business expenses. Business that meet specific requirement may be eligible for PPP forgiveness. Amounts not forgiven, will convert to a low-interest loan. Paycheck Protection Program loans may be a good solution for small to midsize businesses. The PPP can provide these businesses with critical cash that allows them to keep their doors open and pay their employees.
There is a very narrow window of time in which to apply for these funds. Many lenders are overwhelmed with applications and unable to process them in a timely manner – in many cases, even before the funding runs out. Some lenders are unwilling to accept applications from business owners who do not have a previous business relationship established prior to Covid-19.
Pros and cons of the Employee Retention Credit
The Employee Retention Credit allows business owners quick access to cash via a reduction in payroll tax deposits or an advance refund procedure. The Employee Retention Credit isn’t a loan, so it does not need to be repaid, however, specific criteria must be met and careful calculations must be made to utilize the ERC.
Because the ERC is not a loan, recipients don’t need to repay funds.
Comparing ERC and PPP loans
Generally, businesses with more than 500 employees or businesses with primarily low-wage workers may find greater benefit through the ERC than the PPP. Lenders calculate PPP loans using your average monthly payroll costs, while the ERC is driven more by employee headcount.
Wouldn’t you rather focus on careful and strategic planning opportunities to actually reduce your taxable income to the lowest LEGAL amounts possible?
A professional review of each situation can and should be the first course of action.
As an Enrolled Agent (America’s Tax Expert), Certified Tax Planner and a Certified Tax Coach, it’s my job to take a proactive approach with clients by performing a comprehensive and expert analysis of their tax situation and utilizing the current tax code to uncover opportunities which could potentially empower them to have a positive impact on future tax outcomes.
In depth planning is not something that can be done “after-the-fact” during tax season; that is to say – simply reviewing history. My job is to help you “write history”. I hope that the information provided to you encourages YOU to be proactive and inspire you to reduce your tax burden! We love tax questions and look forward to sharing our knowledge and expertise with those that want to help themselves.
Don’t let the rules and regulations become your tax nightmare! If you have questions on the above material, or would like to schedule an appointment to review how you may take advantage of the many tax-saving strategies and opportunities which are available, call me today! I will be glad to schedule your personalized tax planning session.
If you found this article useful, please do not keep it a secret. Share it with a fellow business owner. Remember, friends don’t let friends OVERPAY THEIR TAXES! I ask Better Questions – I provide Better Strategies!
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The resources described above are made available to businesses within the United States of America.
COVID-19 relief programs are evolving regularly. Please visit SBA.gov for the most up to date information.
IRS is providing Covid-19 related Q&A on the tax credits
IRS Reference for New Employer Tax Credits
**Above PPP and tax credit information was collected from multiple sources including the SBA, IRS bulletins and notices, various software services and providers and is accurate as of this writing.
Due to the complex nature of the current economic situation, the extensive volume of law changes and the speed at which information is being distributed, careful attention should be given to each taxpayer’s individual situation to review the most up-to-date laws and interpretations.