Due to the massive demand for assistance from the Coronavirus Aid, Relief and Security (CARES) Act, Congress voted to approve an additional $310 billion for the Paycheck Protection Program (PPP) on April 21, 2020. The first round of funding was depleted in just 14 days after going live and many expect the second round to go just as quickly. Fortunately, there are other relief programs available through the CARES Act for businesses who aren’t able to secure a PPP loan or don’t qualify to apply for one.
In a series of articles, Asure has reviewed new government assistance programs including the popular PPP and expansion of the economic injury disaster loans (EIDL) program that provides businesses with advance grants of up to $10,000. Today, we’ll take a look at the IRS Employee Retention Credit, a program that could provide your business with some immediate relief.
What is the IRS Employee Retention Credit?
By leveraging the IRS Employee Retention Credit, qualifying businesses can claim credits immediately, reduce payroll taxes sent to the IRS, and if credits exceed taxes, request a direct refund. The credits are available to employers of all sizes, including tax-exempt organizations. The credits are calculated at 50% of qualifying wages—paid after March 12, 2020 and before January 1, 2021—and a portion of employer-provided health care paid to employees up to $10,000. The measures are calculated each calendar quarter. The maximum credit for an eligible employer is $5,000 per employee.
According to the IRS, qualifying employers must fall into one of the following categories:
The business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
The employer’s gross receipts are below 50% of the comparable quarter in 2019. Once gross receipts go above 80% of a comparable quarter in 2019, the business no longer qualifies for the credit after the end of that quarter.
Exemptions and interaction with other CARES Act relief programs
State and local governments and their instrumentalities are not eligible for the IRS Employee Retention Credit. Additionally, any small business that receives another small business interruption loan under the PPP is ineligible to claim the employee retention credit
However, an employer can receive tax credits for both the qualified leave wages under the Families First Coronavirus Response Act (FFCRA) and the employee retention credit under the CARES Act. Be sure that the amount of qualified wages used to calculate the retention credit does not include the amount of qualified sick and family leave wages for which you received tax credits under the FFCRA.
Advantages of the Employee Retention Credit vs PPP
The Employee Retention Credit is broad-based refundable tax credit that is available to employers now and is relatively straightforward to claim. It offers immediate payroll tax relief and assistance continues throughout the 2020 tax year. On the other hand, businesses may have a difficult time securing a PPP loan and navigating the complicated restrictions related to eligibility, cost qualifications, and loan forgiveness. Before making a decision about which option you’ll pursue, be sure to calculate and compare both relief programs to determine which is better for your business. Make sure you evaluate your eligibility, number of employees, amount of relief you are eligible for under both measures, and what you need those funds for.
Calculate and claim the credit
To calculate the amount of eligible credits, employers are required to base qualifying wages on the average number of employees in 2019. For example, if your business had less than 100 employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. There are different rules for employers with more than 100 employees.
It’s important to have a good payroll system or service in place in order to accurately calculate costs and cost basis. Here is how it works:
Step 1: Calculate the amount of your credit for the preceding quarter and reduce your Form 941, Employer’s Quarterly Federal Tax Return deposit by that amount. Make sure you file by April 30, 2020.
Step 2: Starting with Q2, 2020, if your credit for Q1 exceeded the amount withheld for payroll taxes, your business can receive an advance payment from the IRS by submitting Form 7200 Advance Payment of Employer Credits Due to COVID-19.Step 3: Repeat these steps for each quarter during the 2020 tax year in which you qualify for a credit.
Ensure compliance with these tax credit rules
To meet record keeping requirements set forth by the IRS Employee Retention Credit program, your business must keep documents that show how your credit amount was calculated. Your business should also hold onto documents that prove your business had to suspend operations or experienced a decline in gross receipts. Keep copies of all forms submitted to the IRS, including Form 7200 if you applied for an advance payment. Ensure accuracy and simplify your payroll record keeping with help from payroll and tax compliance solutions or services.
It’s also important to talk to your accountant or seek legal advice specific to your business. Since many of these programs were put together and rolled out quickly, there are some rules that remain unclear. To minimize risk, it’s important to stay tuned for continued updates, clarification, and guidance from these government programs. For example, the AICPA has called for more IRS guidance in the Retention Credit program to clarify social security tax payment deferrals, reduced schedule/regular wage situations, and a more specific definition of “trade or business.”
We’re here to help your small business
To keep up with all the changing legislation and take advantage of new assistance programs, it’s important to have payroll software and services that work as hard as you do. Solution providers like Asure he
lp you automate all the complex moving parts associated with payroll and taxes, provide supporting documentation needed to apply for new federal relief packages, and maintain the reports required to maintain compliance.