by:Gene Marks/Hartford

• COVID-19

There’s a lot of attention right now on programs like the Paycheck Protection Program and disaster loans offered by the Small Business Administration. Those options were meant to help business owners receive immediate funding as a crisis management strategy resulting from COVID-19. But there’s another big federal benefit that may apply to you: The Payroll Tax Credit (also known as the Employee Retention Credit).

1. The credit is part of the federal response to the pandemic.

As part of one of the numerous pandemic-related stimulus bills passed by Congress in March, the Payroll Tax Credit, otherwise known as the Employee Retention Credit, is a way to receive funding from the government. Eligible businesses must have been impacted by COVID-19 between March 12, 2020 and January 1, 2021. The intention of this credit is to help keep employees on the payroll for as long as possible by providing some tax incentives to employers. Non-profits also qualify, but self-employed individuals do not.

2. The credit only applies if you don’t take money from the Paycheck Protection Program.

Because the credit is intended to provide additional subsidies to help employers maintain payroll levels, you can not apply for it if you’ve already opted in to the Paycheck Protection Program, which offered low cost forgivable loans that also cover payroll expenses. You are, however, eligible to apply for other types of loans, like the Economic Injury Disaster Loans, from the SBA.

3. The credit is in addition to the tax credit for Emergency Family Medical Leave.

This credit is not to be confused with the tax credit under the Families First Coronavirus Response Act (which includes Emergency Family Medical Leave provisions). This article is not intended to go into detail on that legislation, but know that if you’re paying for your employees to take time off for themselves or their families as a result of COVID-19, you’re also entitled to an additional credit to help you afford those expenses. You can use both tax credits, but just not for the same wages. You can learn more about the Families First Legislation on The Hartford’s Paid family and Medical Leave Resource Center.

4. You must show your business has been significantly harmed by the pandemic.

To be eligible for the credit, you must demonstrate that either your business had to shut down during a payroll quarter because of the pandemic (as a result of a government order), or that your business suffered a 50% or greater loss of revenue during the quarter when compared to the previous year.

5. The credit is quite generous.

The credit is 50% of up to $10,000 of each employee’s wages (including healthcare premiums) each quarter through December 31, 2020. In other words, it’ll likely be $5,000 per employee each quarter, assuming they make more than $10,000 that quarter. So, if you have ten employees, you’ll get a $50,000 credit against your payroll taxes that quarter. If you had more than 100 full time employees in 2019, you include only full time workers. If you had less than 100 full time employees in 2019, you can include both full time and part time workers.

6. The credit is taken on your payroll tax returns.

This is not an income tax credit. It’s a payroll tax credit. That means you can take it against the employer’s share of FICA you owed during the eligible quarter when you do quarterly Federal 941 payroll tax returns.

7. The big news: it’s refundable!

More importantly, it’s refundable, which means that whatever portion of the credit you don’t need will be considered an over-payment of payroll taxes and will be returned back to you as cash.

8. You can also reduce your tax deposits.

If you think that you’ll be qualifying for the credit during a quarter, the IRS will allow you to hold back on your tax deposits so that you’ll have more cash available, rather than waiting for them to send you the cash back after you file your 941.

This payroll tax credit may not be for everyone, but it’s certainly applicable for your business if you’re not receiving any other aid. If that’s the case, it could be a substantial cash infusion from the government and may make the difference for your company’s survival. Talk to your accountant and payroll company to make sure you’re taking advantage!

Form 941 – added clarification

The note added and attached to Form 941 and its instructions clarifies that, to claim the employee retention credit, employers that paid qualified wages during the period from March 13, 2020, through March 31, 2020, are to include 50% of those wages together with 50% of any qualified wages paid during the second quarter of 2020 on the employer’s second quarter Form 941, Form 941-SS or Form 941-PR.* The release explicitly states that employers are not to include the credit on the first quarter Form 941, Form 941-SS or Form 941-PR.

_{*Form 941-SS is used to report social security and Medicare taxes for workers in American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. Virgin Islands. Form 941-PR is used by employers in Puerto Rico to report income taxes, social security tax, or Medicare tax withheld from employees’ paychecks and to pay the employer’s portion of social security or Medicare tax.}
 

CARES Act – Employee retention credit

The employee retention credit was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. No. 116-136) signed into law by the president on March 27, 2020.

The employee retention credit allows a refundable tax credit equal to 50% of qualified wages (including qualified health plan expenses) paid

corresponding taxes imposed on railroad employers.

• Eligible employers: The credit is generally available to employers that carry on a trade or business during calendar year 2020 that either: (1) is fully or partially suspended due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19; or (2) has a significant decline in gross receipts (i.e., gross receipts for a calendar quarter are less than 50% of gross receipts for the same quarter in the prior year).
• Qualified wages: For employers that averaged more than 100 full-time employees in 2019, qualified wages includes wages paid to employees for time that they are not providing services due to one of the two reasons described above—full or partial suspension, or significant decline in gross receipts. For eligible employers with an average of 100 or fewer full-time employees in 2019, qualified wages includes wages paid to any employee during one of these periods.
• Effective dates: The credit applies with respect to qualified wages paid from March 13, 2020, through December 31, 2020.

Observation

Additional considerations and limitations on the ability to claim the employee retention credit may apply. Employers that may be eligible to claim the employee retention credit need to consider the criteria for eligibility and measuring qualified wages, as well as how to properly report and claim the credit.

By KPMG