ERC Under the Cares Act

Dear Clients and Friends,

The IRS has published frequently asked questions on the employee retention credit that is contained in the CARES Act.

Background. The CARES Act provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit is available to employers, including non-profits, whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings. The credit is also provided to employers who have experienced a greater than 50% reduction in quarterly receipts, measured on a year-over-year basis. The maximum amount of qualified wages 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.

Eligible employers. Governmental employers are not eligible employers for the Employee Retention Credit. Also, self-employed individuals are not eligible for this credit for their self-employment services or earnings.

When is the operation of a trade or business partially suspended for the purposes of the credit? The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings due to COVID-19 such that the operation can continue to operate but not at its normal capacity.

The 50% reduction in quarterly receipts rule. Under the 50% reduction in quarterly receipts rule, the period during which the credit is available ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80% of its gross receipts for the same calendar quarter during 2019.

Is an employer required to pay qualified wages to its employees under the CARES Act? No. The CARES Act does not require employers to pay qualified wages.

Can eligible employers claim the credit for qualified wages paid in March 2020? Eligible employers may claim the Employee Retention Credit for qualified wages that they pay after March 12, 2020, and before January 1, 2021. Therefore, an employer may be able to claim the credit for qualified wages paid as early as March 13, 2020.

Against what employment taxes does the credit apply? The credit is allowed against the employer portion of social security taxes.

Refundability of the credit. Employers may receive a refund if the amount of the credit is more than certain Federal employment taxes owed. Consistent with its treatment as an overpayment, the excess will be applied to offset any remaining tax liability on the employment tax return, and the amount of any remaining excess will be reflected as an overpayment on the return.

Can an employer paying qualified wages fund its payments of qualified wages before receiving the credits by reducing its Federal employment tax deposits? Yes. An employer may fund the qualified wages by accessing Federal employment taxes, including those that the employer already withheld, that are set aside for deposit with the IRS, for other wage payments made during the same quarter as the qualified wages.

That is, an employer that pays qualified wages to its employees in a calendar quarter before it is required to deposit Federal employment taxes with the IRS for that quarter may reduce the amount of Federal employment taxes it deposits for that quarter by half of the amount of the qualified wages paid in that calendar quarter. The employer must account for the reduction in deposits on the Form 941, Employer’s Quarterly Federal Tax Return, for the quarter.

May an eligible employer receive both the tax credits for the qualified leave wages under the FFCRA and the CARES Act? Yes, but not for the same wages. The amount of qualified wages for which an 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.

May an eligible employer receive both the Employee Retention Credit and a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act? No. An employer may not receive the Employee Retention Credit if the eligible employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act. An employer that receives a Paycheck Protection Loan should not claim Employee Retention Credits.

Please remain safe and healthy. Please contact us with any questions regarding the credit and other payroll matters under the CARES Act.