Sec. 2301: Employee Retention Credit for Employers
This provision provides a refundable payroll tax credit for 50% of wages paid by eligible employers to certain employees during the COVID-19 crisis. The credit applies to wages paid after March 12, 2020, and before Jan. 1, 2021.
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, beginning with the first calendar quarter beginning after Dec. 31, 2019, where gross receipts are less than 50% of gross receipts for the same calendar quarter in the prior year and ending with the calendar quarter for which gross receipts of such employer are greater than 80% of gross receipts for the same calendar quarter in the prior year.
The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 of the Act (i.e., Paycheck Protection Program).
Wages Paid to which Employees?
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employers’ closure or reduced gross receipts are eligible for the credit. For any period in which the employer is allowed a Work Opportunity Credit for an employee, the Employee Retention Credit is not available for that employee.
Qualified wages are capped at the first $10,000 of compensation paid by the employer to an eligible employee. The term ‘‘qualified wages’’ includes the eligible employer’s qualified health plan expenses as are properly allocable to such wages. Specifically, amounts paid or incurred by the eligible employer to provide and maintain a group health plan but only to the extent that such amounts are excluded from the gross income of employees. Qualified wages paid or incurred by an eligible employer may not exceed the amount such an employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.
Wages do not include amounts considered for required paid sick leave or required paid family leave in the Families First Coronavirus Act, nor for wages considered for the employer credit for paid family and medical leave.
The IRS has been granted authority to advance payments to eligible employers and to waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit.
The credit allowed for any calendar quarter can not exceed the applicable employment taxes on the wages paid for the employment of all the employees of the eligible employer for such calendar quarter. The employment taxes that are available for the credits include the employer’s portion of Social Security taxes for all employees. Note: The draft version of Form 7200 indicates that this also includes withheld federal income tax, the employee’s share of Social Security and Medicare taxes, and the employer share of Medicare taxes.
Refundability of the Excess Credit
In general, if the amount of the credit exceeds the employment tax limitation for any calendar quarter, such excess will be treated as an overpayment that will be refunded.
How to Apply
File Form 7200, Advance Payment of Employer Credits Due to COVID-19. You can file the form for an advance payment of the credits anticipated for a quarter at any time before the end of the month following the quarter in which you paid the qualified wages. If necessary, you can file Form 7200 several times during each quarter.
Employer Bob’s Enterprises experiences a decline in gross receipts by more than 50% and pays qualified wages of $7,000 to Employee Jane in the second quarter of 2020. Bob’s Enterprises is entitled to an Employee Retention Credit of $3,500 ($7,000 wages x 50%) for Jane. If Bob’s Enterprises is required to deposit $1,000 in employment taxes for Jane, then Bob’s Enterprises could retain the entire $1,000 of taxes as a portion of the refundable tax credit and receive a refund for the remaining $2,500. Bob’s Enterprises then uses this calculation for each eligible employee to figure the total credit and files a request for an advance payment of the portion in excess of employment taxes using Form 7200.
Reaching the $10,000 Cap
In the third quarter, Bob’s Enterprises pays Jane another $7,000 in qualified wages. The employer is entitled to a credit of $1,500 because Jane reached the $10,000 qualified wage cap on the first $3,000 of wages.
Sec. 2302: Delay of Payment of Employer Payroll Taxes
This provision allows the deposit of the employer’s portion of Social Security tax due for the period from March 27, 2020, to Dec. 31, 2020, to be delayed. The deferred taxes are due in two installments: 50% of the taxes due for this period can be deposited by Dec. 31, 2021, and the remaining 50% can be deposited by Dec. 31, 2022, and will be considered timely.
This provision also applies to self-employed individuals. Half of the Social Security portion of self-employment taxes can be delayed. The deferment does not apply to employee payroll taxes or employer Medicare taxes.
Employers are eligible for the deferment regardless of whether their operations were impacted by COVID-19. However, employers that acquire a loan through the Paycheck Protection Program, for which all or part of the loan was forgiven, are not eligible to delay the payments.
If the employer directs a third-party payroll provider to defer payment of any applicable employment taxes during the payroll tax deferral period under this section, the employer shall be solely liable for the payment of the applicable employment taxes before the applicable date.
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