Employee Retention Credit Provides Relief for Organizations with No PPP
What Is the ERC?
As the SARS-CoV-2 virus and incidence of COVID-19 continue to have unprecedented, far-reaching effects on the global, national and local economies, most of the media attention has focused on the Paycheck Protection Program (PPP). However, employers who were sized out of the PPP—or may have opted out because of its procedural requirements and regulatory uncertainty—may have an opportunity to take advantage of the Employee Retention Credit (ERC). Some recent guidance from the IRS may provide economic benefit for employers who have furloughed employees or cut their hours.
The ERC was enacted in Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to provide a monetary incentive in the form of tax credits for employers to maintain their employees. It’s available to organizations of any size, including tax-exempt organizations. The credits are available to organizations that find themselves in one of the following situations: 1) Their business has been partially or fully suspended by governmental orders due to COVID-19, or 2) they have experienced a significant decline in gross receipts during the quarter (gross receipts of less than 50 percent of the same calendar quarter in 2019). Employers who fall into one or both buckets outlined above may claim the credit on qualified wages. For more information on determining eligibility, see this recent BKD Thoughtware® alert.
How to Calculate Qualified Wages
Qualified wages are those paid between March 13, 2020, and December 31, 2020. Health insurance premiums paid during that same period also are considered qualified wages, including both the portion paid by the employer and any employee-paid health insurance costs that were paid with pretax salary. Further, an employer must look to its average full-time employee count during 2019. If that number is 100 or fewer, wages paid to any employee during the specified period are qualified. Employers with more than 100 employees on average during 2019 may only treat wages as qualified that are paid to employees who aren’t currently providing services, i.e., “nonproductive hours.”
These eligibility requirements have led many larger employers to write off the ERC as a viable option, as they may not be paying many employees who aren’t providing services. However, certain frequently asked questions and examples published by the IRS clarify an opportunity for employers who have furloughed employees or have significantly reduced their hours but continue to pay for health insurance. If an employee isn’t providing any services, any healthcare costs paid by the employer are considered qualified wages. Further, if an employee has had their hours partially cut and the employer is still paying full health insurance costs, the costs allocable to the nonproductive hours are eligible for the credit. Any wages that are allocable to nonproductive hours also would be eligible. See the following illustration:
- Person A has had their hours reduced to 30 percent, but their employer continues to pay 100 percent of Person A’s health insurance costs. Therefore, 70 percent of the health insurance costs would be considered qualified wages.
- Same facts as above, except the employer also chooses to pay employee as if they were still working 100 percent of their hours. The 70 percent of wages above and beyond their actual productive hours also are eligible for the ERC.
Note that these examples assume the employer has more than 100 employees. For organizations with 100 or fewer employees, all wages and health insurance costs are eligible, whether an employee is providing services or not.
How to Calculate & Claim the Credit
Once the amount of qualified wages is determined, calculating the credit is simple. For each employee, an organization would multiply the amount of qualified wages up to $10,000 by 50 percent; the credit is limited to $5,000 per employee. There’s no dollar limit on how much in total tax credits an organization can claim, only a per-employee limit.
The ERC is claimed on the quarterly payroll tax return (Form 941) filed by the organization. To actually fund the qualified wages and/or health insurance premiums, the organization can use payroll taxes that otherwise would be due to the IRS. If the organization doesn’t have sufficient payroll taxes set aside to fund the qualified wages, it also has the option of filing for an advance of the credit on Form 7200. The credit is applied against the organization’s Social Security tax liability (6.2 percent of employee wages), and it’s fully refundable. That means if an organization’s credit offsets its entire Social Security tax liability in any calendar quarter, the excess credit is applied to other employment taxes and any remaining credit is then refunded to the employer.
On May 15, the House passed its version of the fourth stimulus package, called the HEROES Act, which could significantly increase the ERC’s economic benefits. Among other modifications, the credit percentage on qualified wages would be increased from 50 percent to 80 percent, and the limit on qualified wages per employee would be increased from $10,000 for the entire year to $15,000 per quarter ($45,000 for the year). These changes together effectively increase the allowable credit per employee from $5,000 to $36,000. Furthermore, the HEROES Act proposes to replace the current 100-employee cutoff for determining qualified wages with a “large employer” concept of 1,500 full-time employees and gross receipts of greater than $41.5 million in 2019. The bill as passed by the House is likely to be modified by the Senate prior to being voted into law, so the effect of these provisions is uncertain at this time.
The CARES Act provides that employers may avail themselves of either the PPP or the ERC, but not both. However, if employers have returned the PPP loans by the safe harbor date of May 18, they would again be eligible for the ERC. Many smaller employers likely have chosen to use the PPP, as it may be of larger economic value. In contrast, numerous larger employers should be aware of the opportunities available to them under the ERC. Since there’s no need to compete with other companies for limited funds, manage over-extended lenders or cope with extensive and complex compliance requirements, for larger employers who have furloughed a large portion of their workforce or have reduced hours, this credit could really be no-strings-attached, “found” money.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. If you have questions, please reach out to your BKD Trusted Advisor™ or use the Contact Us form below.