So you did not receive a Payroll Protection loan. What else can you do to help your business?
Two of the most sought-after forms of coronavirus relief for employers are Paycheck Protection Program (PPP) loans and the Employee Retention Credit. Unfortunately, you can’t take advantage of both.
This post will explain the Employee Retention Credit. If you did not apply, applied and did not get a PPP Loan, then read one. If you did receive a PPP loan, you cannot take the retention credit.
There is a period of time when you can receive a PPP loan and defer paying the employer portion of Social Security tax. This Social Security tax deferment is not the same thing as claiming the Employee Retention Credit. Rather, this is a universal employer benefit under the CARES Act, according to the IRS. However, you cannot defer paying this tax if your PPP loan is forgiven.
If you’ve received a PPP loan, you can defer paying the employer’s SS tax share while waiting to hear if your loan is forgiven. You can defer the portion that is owed between March 27, 2020 and the date your lender issues a forgiveness decision.
If your loan is forgiven, stop deferring Social Security tax payments after that date. The amount you deferred before receiving the decision are due, without penalties (per the IRS notice):
December 31, 2021 (50%)
December 31, 2022 (remaining amount)
Now, on to the Employee Retention Credit.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established both the Paycheck Protection Program and Employee Retention Credit. Both relief measures encourage employers to keep employees on their payroll. They essentially provide employers with funds to cover payroll costs. One comes in the form of an SBA-guaranteed loan and the other in the form of a payroll tax credit.
Paycheck Protection Program: The PPP is a forgivable loan employers can apply for through an approved lender to help cover payroll costs (wages up to $100,000, employee benefits, and state and local taxes). Employers can also use some of the funds (25%) to cover interest on mortgages, rent, and utilities.
Employee Retention Credit: The credit is a refundable payroll tax credit employers can claim on their federal employment tax return to cover employee wages and qualified health plan expenses associated with those wages. Employers of any size are eligible for the Employee Retention Credit if they meet the qualifications. But, self-employed individuals cannot claim the credit for their self-employment services or earnings.
To qualify, you must have experienced either of the following in any calendar quarter in 2020:
Fully or partially suspended operations due to COVID-19-related government orders
Saw gross receipts drop below 50% of the comparable quarter amount in 2019
Employers can claim this payroll tax credit on qualifying wages paid between March 13, 2020 – December 31, 2020. You can can receive a maximum credit of $5,000 per employee. Credits are worth 50% of qualifying wages and associated qualified health plan expenses paid to employees (up to $10,000 in wages per employee).
Again, employer size doesn’t matter when it comes to Employee Retention Credit eligibility. However, your average number of full-time equivalent employees in 2019 determines qualifying wages.
If you averaged fewer than 100 FTEs, your tax credit is based on wages paid to all employees during the period of suspended operations or gross receipts decline. If you averaged more than 100 FTEs in 2019, the tax credit is based on wages paid to employees who did not work during the period of suspended operations or gross receipts decline.
You can immediately reduce liabilities owed for a tax by retaining contributions rather than depositing them with the IRS. Then, record or claim the credit on your federal employment tax return (e.g., Forms 941, 944, or 943).
You do not have to repay the Employee Retention Credit, nor do you have to apply for forgiveness.
However, if you receive an advance of the credits (using Form 7200), you’ll need to account for that amount when filing your federal employment tax return.
Keep documents showing how you calculated the credit amount. Also retain documents that show that you had to suspend operations or experienced a decrease in gross receipts. If you applied for an advance, keep a copy of Form 7200 in your records, too.
If you choose to take the Employee Retention Credit and the paid leave credits, you can’t claim those credits on the same wages. Because you can only claim the paid leave credits on paid leave wages, you cannot claim the Employee Retention Credit on FFCRA paid leave wages.
And if you receive a Paycheck Protection Program loan and claim paid leave credits, the paid leave wages do not count as eligible “payroll costs” under the PPP’s loan forgiveness. Because you claim the paid leave credit on FFCRA paid leave wages, do not count FFCRA paid leave wages as payroll costs when asking for PPP loan forgiveness.
If this gives you a headache, call us and we will help you navigate through it.
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