The Employee Retention Credit: Payroll Tax Credit for Businesses During the Coronavirus Pandemic

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By Pooja Srivastava and Kislay Banka

To help manage to the impact of the coronavirus (COVID-19) pandemic, many employers who operated a business during 2020 can claim the refundable Employee Retention Credit (ERC) payroll tax credit under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The credit is equivalent to 50% of wages paid during the COVID-19 crisis. Businesses must also meet one of the following conditions to qualify:

  1. They suspended business operations due to a government COVID-19 order during any calendar quarter of 2020, or
  2. Their gross revenue declined by more than 50 percent from the same quarter of the previous year

how much tax credit can employers receive for the erc?

Eligible employers can receive varying payroll tax credits based on their number of full-time employees:

  • 100 or fewer: all employee wages qualify for the ERC
  • More than 100: only wages paid to employees when they are not working due to COVID-19 will qualify

The credit applies to the first $10,000 of compensation (including health benefits) paid to an eligible employee from March 13, 2020 through December 31, 2020.

The amount of the Employee Retention Credit allowed for any calendar quarter cannot be greater than the Social Security tax imposed on the employer.

For employers who have seen a significant decline in gross revenue, the eligible period for the tax credit:

  • Begins in the first quarter where an employer’s gross receipts in 2020 are less than 50 percent of its gross receipts for the same quarter in 2019
  • Ends with the following quarter after the first quarter where the employer’s 2020 gross receipts are greater than 80 percent of its gross receipts for the same quarter during 2019

aggregation rules and foreign affiliates

Groups that are treated as a single employer under certain provisions are treated the same way for the purposes of the ERC:

  • Controlled groups of corporations [Code Sec. 52(a)]
  • Trades or businesses under common control [Code Sec. 52(b)]
  • Affiliated service groups [Code Sec. 414(m)]
  • Other organizations or arrangements described by regulations [Code Sec. 414(o) (Act Sec. 2301(d) of the CARES Act)]

While code sections 52(a) and 414(m) mention aggregation rules, the Coronavirus Aid, Relief, and Economic Security (CARES) Act and clarifications from the Federal Reserve and Small Business Administration (SBA) indicate that employers may exclude foreign affiliates for the purpose of the Paycheck Protection Program (PPP). It is unclear whether the Employee Retention Credit will be treated the same way, but it is possible since the law aims to protect American employment.

tax credit examples for the employee retention credit (ERC)

As an example, the below business has 63 employees making an average of $100,000 each. The business will be able to get a benefit of approximately $390,000 under the ERC.

Employees Social Security Tax (6.2% capped up to $137,700) Average wages

$100,000

Net Credit Benefit
63 $100,000*6.2%/emp Approx. $390,000

Below is an example of a greater than 50% decline in gross receipts during the second quarter of 2020 compared to the second quarter of 2019. The employer would be entitled to a retention credit for the first and second calendar quarters:

Gross Receipts 2020 2019 Percentage Change
Quarter 1 $100,000 $210,000 48%
Quarter 2 $190,000 $230,000 83%
Quarter 3 $230,000 $250,000 92%

Applying for the employee retention credit (ERC)

Businesses should file Form 7200 by fax at (855) 248-0552 to apply for ERC and receive an advance payment of the credits anticipated for a quarter. The form is due any time before the end of the month after the quarter in which the employer paid the qualified wages. If necessary, businesses can file the form several times during each quarter.

Conclusion

For help applying for the Employee Retention Credit, contact a trusted Chugh CPAs, LLP professional.