Employee Retention Credits
Eligible employers may take an immediate and refundable credit against the employer portion of their Social Security payroll tax equal to 50% of qualified wages. Below, we have summarized key information business owners need in the form of Frequently Asked Questions (FAQ).
Q: Who is an Eligible Employer?
A: An eligible employer means any employer, including an Internal Revenue Code Section 501(c) tax exempt entity, that was carrying on a trade or business during 2020 and either:
- the employer’s operations were fully or partially suspended during a calendar quarter due to governmental orders related to COVID-19, or
- the calendar quarter is within a period of significant decline in gross receipts (gross receipts are calculated using the gross receipts test under IRC Section 448(c)).
Q: May employers who take a Paycheck Protection Program (PPP) loan under the CARES Act receive this retention credit?
A: The statute says that employers who take a PPP loan are not eligible for the retention credit; however, it is not clear is how this exclusion would work for employers who receive this retention credit and who subsequently take a PPP loan. Further guidance on this is expected.
Q: How do you Determine a Significant Decline in Gross Receipts?
A: A period of significant decline in gross receipts begins with the first 2020 calendar quarter where gross receipts were less than 50% of gross receipts for the same quarter in the prior year. The period ends following the first quarter where gross receipts are greater than 80% of gross receipts for the same quarter in the prior year.
For example, the employer’s gross receipts in the below table show the employer’s period of significant decline in gross receipts begins January 1, 2020 (beginning of quarter 1) and ends September 30, 2020 (end of quarter 3). Although quarter 4 is below 80%, it is not below the 50% threshold to trigger a new period.
|2019 Gross Receipts
|2020 Gross Receipts
|Comparison to Prior Yr
(decline ends because prior quarter > 80%)
Q: What Wages Constitute Qualified Wages for Purposes of the Credit?
A: The meaning of qualified wages depends upon the size of the eligible employer.
- Qualified wages for an eligible employer who averages 100 full-time employees or less are any wages paid to employees during the period between March 12, 2020, and January 1, 2021. Thus, for example, wages paid to furloughed workers, as well as salaries paid to employees working from home, are qualified wages.
- Qualified wages for eligible employers who average more than 100 full-time employees are wages paid to employees during the period between March 12, 2020, and January 1, 2021 who are not working. Thus, for example, salaries paid to employees who are working from home are not qualified wages.
The amount of qualified wages is limited to the first $10,000 of compensation per employee, including health benefits.
Full-time status generally means an employee who is employed on average at least 30 hours per week.
Qualified wages may not exceed the amount an employee would have been paid for working an equivalent duration during the 30 days immediately preceding a government COVID-19 order or period of significant decline in gross receipts.
Qualified wages do not include paid sick leave or paid FMLA leave wages mandated under the Families First Coronavirus Response Act.
Additional Miscellaneous Rules
- Credit is reduced by any credit received for sick pay or family leave in Families First Coronavirus Response Act. Any excess employee retention credits will be refunded to the eligible employer.
- If employer receives an IRC section 51 (work opportunity tax credit) credit for an employee, the employee cannot be included in calculating the retention credit.
- Wages taken into account for the retention credit cannot be used to determine the credit allowed under IRC section 45S (credit for paid family and medical leave).
Paycheck Protection Program Loan Forgiveness
A loan recipient under the Paycheck Protection Program (PPP) may be eligible for loan forgiveness on a portion of its PPP loan. Below, we have summarized key information business owners need in the form of Frequently Asked Questions (FAQ).
Q. How much loan forgiveness is available?
A. The amount of forgiveness is equal to the following costs incurred and payments made during the eight-week period following the date the recipient receives the PPP loan:
- Payroll costs,
- Any payment of interest on any covered mortgage obligation,
- Any payment on any covered rent obligation, and
- Any covered utility payment.
There are further conditions placed on the amount forgiven. The purpose of these conditions is to incentivize employers to retain full-time employees at the same level of pay or rehire full-time employees after the COVID-19 pandemic. The amount of forgiveness may be reduced proportionally for a reduction in headcount or salaries; however, employers can eliminate the reduction in headcount or salaries by June 30, 2020 and restore the maximum loan forgiveness.
For example, employers who receive a PPP loan and layoff 25 full-time employees in March and April may still receive some loan forgiveness if the employer later rehires 25 or more full-time employees by June 30, 2020.
Under normal circumstances, the amount of debt that is forgiven is included in a taxpayer’s taxable income. However, the portion of the PPP loan that is forgiven is not included in taxable income.
Q. Who is eligible for a PPP loan?
A. Congress authorized PPP loans up to $10 million for any business, nonprofit organization, veterans’ organization, or Tribal business that employs 500 or less employees. Full-time and part-time employees are counted for this purpose.
Q. Are there any limitations on payroll costs?
A. Payroll costs include most forms of compensation subject to the following limitations:
- Compensation in excess of a $100,000 annual salary,
- Federal income tax, Social Security, or Medicare,
- Compensation paid to nonresident aliens,
- Qualified sick leave wages or family leave wages for COVID-19; and
- Certain income earned by sole proprietors or independent contractors.
Q. How does PPP operate in connection with a deferral of Employer Payroll Taxes?
A. Employers and self-employed individuals who did not receive PPP loan forgiveness may defer payment of the employer portion of their Social Security taxes on wages paid between March 27, 2020, and December 31, 2020. The employer is required to pay the deferred employment tax over the following two years. Meaning half of the deferred amount of Social Security tax is due by the end of 2021, and the other half is due by the end of 2022.
It is not clear how the PPP exclusion will apply to an employer who defers payments payment prior to receiving a PPP loan. Further guidance on this is expected.
Note: These materials above are for informational purposes only and deal with issues that are under review. Further guidance will be forthcoming from governmental authorities.