Operational decisions have never been more important than they are during this difficult time, especially when it comes to the decision of whether to retain employees. One provision that provides relief for businesses that continue to pay employees during the COVID-19 crisis is the Employee Retention Credit.
For businesses that retain employees during the pandemic, an employer may qualify for the credit if their trade or business is fully or partially suspended due to a government order related to the COVID-19 crisis. The employer may also qualify if the business remains open during the pandemic, but the business experiences a significant decrease in gross receipts compared to the same quarter in 2019.
The credit is limited to wages paid from March 13, 2020, through December 31, 2020, up to $10,000 per employee ($5,000 maximum credit per employee). Qualified wage factors differ depending on the average number of 2019 full-time employees.
It is important to note that wages used in determining the new payroll tax credits for paid sick time or paid family medical leave under the Families First Coronavirus Response Act are not eligible for the Employee Retention Credit. Also, employers who secure a Paycheck Protection Program loan under the CARES Act are not eligible for the credit.
Deferral of employment tax deposits and payments through December 31, 2020
One of the valuable provisions of the CARES Act allows employers the ability to defer certain payroll tax deposits and payments to lessen the burden on cash flows during the pandemic. This applies to all businesses, self-employed individuals, and partners in partnerships; there is no need-based eligibility required for the deferral.
The deferral applies to deposits and payments of the employer’s 6.2% Social Security tax (or equivalent amount for a self-employed individual) that would otherwise be required to be made beginning on March 27, 2020 through December 31, 2020. The Form 941, Employer’s Quarterly Federal Tax Return, will be revised for the second quarter of 2020 to reflect the deferred deposits and payments, and instructions will be forthcoming. There is no special election that has to be made in order to defer the payroll taxes, and there is no dollar amount cap on the wages that are counted in the calculation of taxes that may be deferred.
The only caveat is that if your business received a Paycheck Protection Program (PPP) loan under the CARES Act, the deferral is not allowed once a decision is received from the lender that the PPP loan is forgiven.
The Employee Retention Credit is one of several available tools designed to provide essential cash flow and liquidity during this difficult time; if you have questions about any of these provisions or how they may impact your business, please do not hesitate to contact us.