Employee Retention Credits

As the ongoing COVID-19 pandemic and resulting restrictions continue to impact business operations on a local and national level, the federal government has implemented legislation and aid packages to help business owners and employers stay afloat and meet their operational needs through the crisis.

The Paycheck Protection Program (PPP) was designed under the CARES Act to help struggling small and mid-size businesses meet their payroll obligations to their employees while operations were impacted due to state and federal government mandated stay at home and shut down orders to curb the spread of the coronavirus.

Here's what you need to know about employee retention credits and the basics of the Paycheck Protection Program (PPP).

What are Employee Retention Credits?

Small business owners have been especially hard hit and negatively impacted by the outbreak of the COVID-19 pandemic and the resulting restrictions on their operations. Retaining and paying staff in light of reduced business hours and social distancing mandates as well as business closures has been one of the biggest pain points for small and mid-size business owners across most industries.

To help small business owners with limited resources and to help stem the tide of unprecedented unemployment claims at the onset of the pandemic, the federal government implemented measures like employee retention credits as part of the CARES Act.

According to the Internal Revenue Service (IRS):

"The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer's employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.

For each employee, wages (including certain health plan costs) up to $10,000 can be counted to determine the amount of the 50% credit. Because this credit can apply to wages already paid after March 12, 2020, many struggling employers can get access to this credit by reducing upcoming deposits or requesting an advance credit on Form 7200, Advance of Employer Credits Due To COVID-19."

It's important for business owners to keep in mind that the provisions to the law are constantly being updated as conditions improve and evolve, so it's a good idea to check the IRS website on a regular basis to stay on top of the law and how it might apply to your own business and employees).

Which Businesses are Eligible for the Employee Retention Credits Program?

The employee retention credits program was designed for businesses that saw a decline in operational income due to pandemic related circumstances, like government mandated shutdown orders, curfews, closures, and other pandemic related disruptions to normal business operations that were beyond the business owners control. It's every business owners responsibility to check on their individual qualifications for any government programs and tax relief programs under the CARES Act, but in short, the program was designed to help businesses owners whose operations and trade were hurt by the government mandates designed to manage the spread of COVID-19.

According to the IRS:

"Eligible Employers for the purposes of the Employee Retention Credit are employers that carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

• • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter.

Note: Governmental employers are not Eligible Employers for purposes of the Employee Retention Credit. However, tribal governments and tribal entities may be Eligible Employers. See Are tribal governments and tribal entities eligible for the Employee Retention Credit? Also, self-employed individuals are not eligible for this credit for their own self-employment earnings, though they may be able to claim the credit for wages paid to their employees.

(For more information, see Determining Which Employers are Eligible to Claim the Employee Retention Credit.")

Qualified Wages for Employee Retention Credits

THe IRS defines qualified wages (50% of $10,000 for each qualified employee, so the business owner's credit would be a max of $5,000) as wages paid between March 12, 2020 and January 1, 2021 (check for udpates and extensions to the program). The tax credit includes the taxes that the employer would pay on qualified health plan expenses as well.

If you're not sure whether your payroll qualifies for the employee retention credits program, here's a breakdown from the IRS on how businesses can determine their potential eligibility:

"The definition of qualified wages depends, in part, on the average number of full-time employees (as defined in section 4980H of the Code) employed by the Eligible Employer during 2019.

If the Eligible Employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship described in (1) or (2) above. 

If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above."

Employee Retention Credits and PPP Loans

The good news is that if your business has taken advantage of a PPP loan, you may still qualify for employee retention credits for qualified employees and wages.