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A Guide to the Employee Retention Tax Credit: An Alternative to the PPP

PPP Loan with Sticky NoteFor more articles from the June 2020 issue of Business & Tax Law News, click here.

The CARES Act created the Employee Retention Tax Credit (“ERTC”), which is designed to provide financial relief to employers during the COVID-19 pandemic. The ERTC is a refundable tax credit that is credited against an employer’s share of social security taxes for specific wages paid on or after March 12, 2020 and before January 1, 2021. An eligible employer can access ERTC funds by (1) immediately reducing employment tax obligations, (2) applying for an advance payment of the estimated credit, or (3) calculating the final credit amount at the end of the applicable calendar quarter, usually on Form 941.  Importantly, an employer that has received a Paycheck Protection Program (PPP) loan cannot also claim the ERTC (unless the employer has repaid its PPP loan by May 14, 2020).

While many businesses have focused on the Paycheck Protection Program’s loan offering due to its attractive loan forgiveness feature, many businesses are ineligible or have been otherwise unable to receive PPP loan funds. The ERTC is an attractive alternative for companies not participating in the PPP, in addition to the Main Street Lending Program, which we previously discussed here.

Below we summarize ERTC eligibility, calculation, options to receive the credit, and other details. The IRS recently published significant additional guidance discussing these issues. Therefore, we recommend that you contact your trusted legal and tax professional before assuming that your organization is eligible.

Which employers are eligible?

Eligible employers include businesses and nonprofits:

  1. Whose operations are required to be fully or partially suspended during any calendar quarter in 2020 due to a government order related to COVID-19 that limits commerce, travel, or group meetings; or
  2. Has experienced a significant decline in gross receipts during the calendar quarter.

A significant decline in gross receipts is generally defined as a decline of more than 50% compared to the same quarter in 2019. A business that is eligible for the ERTC due to a significant decline in gross receipts continues to be eligible until the quarter after the business’s gross receipts exceed 80% compared to the same quarter in 2019. The ERTC can only be claimed for calendar quarters in 2020.

Governmental employers are not eligible for the ERTC and self-employed individuals are not eligible for this credit on the earnings made through their self-employment. However, a self-employed individual who employs others and who otherwise meets the requirements to be an Eligible Employer may be eligible for the Employee Retention Credit with respect to qualified wages paid to the employees.

How do eligible employers calculate the ERTC?

The ERTC is calculated quarterly and is equal to 50% of qualified wages paid to eligible employees, up to $10,000. Therefore, the maximum credit allowed is $5,000 per employee, subject to the rules discussed below. The qualified wages that are used to calculate the tax credit depend on the average number of employees of a business.

If the business employed an average of 100 employees or fewer in 2019, then the eligible business may include wages paid to all employees in calculating the credit, up to $10,000.

If the business employed an average of 100 employees or more in 2019, then the eligible business may only include wages paid to employees who are not providing services as a result of suspended operations or the decline in gross receipts.

Qualified sick and family leave wages that the employer claims as a credit under the Family First Coronavirus Response Act cannot also be included when calculating the ERTC.

How can an eligible employer claim the credit?

The ERTC first reduces the employer’s matching portion of FICA/Social Security (equal to 6.2% of wages) and the excess is refundable. To the extent that there is an excess, the organization has three options as to how to claim the credit.

First, the organization may claim the refundable excess by retaining other payroll tax deposits and payments, including any amounts withheld from employees. Second, the organization may apply for an advance of the refundable excess. To apply for an advance, the organization is required to file Form 7200 “Advance of Employer Credits due to COVID-19” with the IRS and will be required to reconcile the advance credit with its deposits and qualified wages, typically on Form 941 at the end of the quarter. Third, the organization can wait to file Form 941 and elect to receive the excess paid as a refund.

The IRS recently provided significant additional guidance discussing ERTC eligibility, calculation, and several other important details. Please contact us if you have any questions about the ERTC.

Please note that this article is accurate at time of publication. Due to rapidly changing laws and regulations, please consult with your attorney/advisor before taking action to ensure that you have the most up to date information.

Categories: Employment, Tax

Photo of Taylor A. Gast
Associate

Taylor helps businesses and business owners solve and prevent problems as a member of Foster Swift's Business and Tax practice group. He handles business formation and transactions, tax controversies, employee benefits, and technology related issues.

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