Businesses which were able to retain some or all of their employees during the pandemic may stand to benefit from the payroll tax credit created under the CARES Act. Businesses looking to take advantage of this credit, officially termed the Employee Retention Credit, must meet the following criteria.
Which Employers Are Eligible for the Payroll Tax Credit
Available to businesses which have suspended operations, either completely or partially, because of commerce limitations or group meeting and travel limitations imposed by the government due to the pandemic, the payroll tax credit is an option. This is a refundable tax credit that applies to 50% of wages paid by eligible employers to certain employees. The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021.
Businesses that have seen a 50% or greater reduction in quarterly receipts (year-over-year) are also eligible to take advantage of the credit. However, if these employers have gross receipts in excess of 80% when compared to the comparable 2019 quarter, they will no longer qualify for the payroll tax credit starting with the next quarter.
How Wages Affect Eligibility
All employee wages are eligible for the payroll tax credit for employers that had 100 or less full-time employees, on average, in 2019. Even if that employer had to furlough employees or reduce their hours, as long as the affected employees had been paid by the employer in 2019, that employer can still include those employees’ wages as part of the credit.
However, employers with over 100 employees in 2019, can only claim wages paid to those employees who were furloughed or experienced a reduction in hours due to the business closing or a reduction in its gross receipts and would be eligible for the credit. Additionally, if the employer is allowed to take a Work Opportunity Tax Credit for an employee, they are not also permitted to take this payroll tax credit based upon wages paid to that employee during the same time period.
Where the payroll tax credit is concerned, the term “wages” includes health benefits and is capped at the first $10,000 in wages paid by the employer to an eligible employee. Amounts taken into account by the employer as a credit for required medical leave or paid family leave as detailed in the Families First Coronavirus Response Act cannot be included as wages.
Advance IRS Payments and Refunds
Eligible businesses can receive advance payments from the IRS. Additionally, employers may be able to claim a refund if the amount of the payroll tax credit for any calendar quarter exceeds the employer’s applicable payroll taxes. In this instance, the employer can request a refund of the excess when filing their Federal employment tax return.
If an employer expects to receive payroll tax credits, they can plan ahead to fund qualified wages in two ways. An employer can access Federal employment taxes (along with the associated taxes that have been withheld) that are required to be deposited with the IRS. Alternately, the employer can use IRS Form 7200 to ask for the credit advance. Applicable penalties may be waived by the IRS for those employers who refrain from depositing applicable payroll taxes in anticipation of receiving the credit.
If you’re interested in learning more about whether or not the payroll tax credit applies to your business or if you need assistance applying for the credit, contact your Untracht Early advisor.