The recently enacted Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allows employers who are struggling to retain their employees during this economic slowdown an additional tax credit to be applied toward qualified employee wages. Since the Act went into effect, additional guidance has transpired that affords clarity for employers who would like to take advantage of these credits.
Employee Retention Credit
The Employee Retention Credit is a fully refundable employer tax credit that is taken against the employer portion of Social Security taxes under Section 3111(a) of the Internal Revenue Code (Code). The credit is equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. Wages paid after March 12, 2020, and before January 1, 2021 qualify for the credit under the terms of the Act. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.
Because quarterly returns are not filed until after qualified wages are paid, some eligible employers may not have sufficient federal employment taxes set aside for deposit to the IRS to fund their qualified wages. Accordingly, the IRS has established a procedure for obtaining an advance of the refundable credits.
The eligible employer should first reduce its remaining federal employment tax deposits for wages paid in the same calendar quarter by the maximum allowable amount. If the anticipated credit for the qualified wages exceeds the remaining federal employment tax deposits for that quarter, the eligible employer can file a Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advance refund for the full amount of the anticipated credit for which it did not have sufficient federal employment tax deposits.
Under most scenarios, it would be more beneficial for the employer to seek the Payroll Protection Program (PPP) loan over the Employee Retention Credit. The PPP loan affords the taxpayer the opportunity to use up to 25% of the funds for non-payroll-related costs, such as rent and utilities, while the Employee Retention Credit is, as mentioned above, a credit solely on payroll taxes paid on eligible wages. The simple example below highlights the benefit of the PPP loan when compared to the Employee Retention Credit.
Assume the following facts for Company A (amounts rounded):
- 150 employees
- Annual payroll costs of $80,000 per employee
- Weekly payroll costs of $1,538 (($80,000 / 52 weeks) = $1,538)
- Two-and-a half months of payroll – $80,000 * (2.5/12) = $16,667
Recall that the PPP loan is the lesser of $10,000,000 or two-and-a-half months of payroll expenses. In this example, two-and-a-half months of wages would be equal to $2,500,000 ($16,667 x 150). Under this scenario, Company A would receive a maximum PPP loan of $2,500,000. As noted above, the Employee Retention Credit provides for Company A to receive a payroll tax credit equal to 50% of qualified wages on up to $10,000 wages per employee. Using the same facts above, the Company would be eligible for an Employee Retention Credit equal to $750,000 (($10,000 * 150) x 50%).
As presented, the taxpayer would receive over three times the funds from the PPP loan and, if utilized for the intended purposes, could receive up to 100% forgiveness.
Using the facts above, the Employee Retention Credit would only become more beneficial if annual payroll costs for Company A decreased below $26,000, at which time the funds received from the payroll tax credit would exceed the maximum loan amount under the PPP. Of course, all of this depends on the availability of PPP loan funding.
It should be noted that individual facts and circumstances may result in different results, so we would encourage taxpayers to reach out to PYA for guidance on their specific situation.
Accessibility to multiple loans
Eligible employers may receive both the tax credits for the qualified leave wages under the Families First Coronavirus Relief Act (FFCRA), and the Employee Retention Credit under the CARES Act, but not for the same wages. The amount of qualified wages for which an eligible employer may claim the Employee Retention Credit does not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.
Eligible employers may not receive the Employee Retention Credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program authorized under the CARES Act (Paycheck Protection Loan). An eligible employer that receives a Paycheck Protection Loan should not claim Employee Retention Credits.
For an overview of the tax credits related to the expanded medical leave provisions found in the FFCRA, access this PYA insight.
If you have questions or would like further guidance related to COVID-19, visit PYA’s COVID-19 hub, or contact one of our PYA executives below at (800) 270-9629.