In response to the coronavirus, the United States passed several bills which provided relief to both employees and employers in different ways. Probably the most well-known of the bills is the CARES Act which provided cash deposits or checks to eligible Americans, Loans to Small Businesses under the Economic Disaster Injury Loan Programs or Payroll Protection Program, and also a new tax credit which will be discussed below. The tax credit that came from the CARES act is called the Employee Retention Credit, or ERC for short.
Three other credits were also created under different bills that provide relief for specific circumstances. These credits were created before the Employee Retention Credit and as a general rule provide less relief than the ERC. However, that is not true for all cases, and you must calculate which credit is best for your situation.
Starting with the earliest credit created, we will discuss the intent of the credit, and how to calculate the amount:
- The Emergency Paid Sick Leave Act created a credit that is up to $511 per day, per employee for any employee paid sick time for quarantine or any employee experiencing symptoms of the coronavirus (COVID-19). The credit is based upon the actual amount paid by the employer to the employee for that sick leave and is capped at $511 per day for a maximum of 10 days.
- Also created under the Emergency Paid Sick Leave Act, the second credit relates to employees who were paid time off to care for an individual that is quarantined or experiencing symptoms of the coronavirus (COVID-19). The amount for this credit is capped at $200 per day, per employee for a maximum of 10 days. Again, this is a credit back to the employer for sick time paid for the reasons above.
The next credit was created under the Emergency Family and Medical Leave Expansion Act, and provides for a repayment of any employees who were paid to care for their son or daughter, under age 18, if unable to work while their school or daycare provider was closed due to the coronavirus (COVID-19) public health emergency declared by an Federal, State or Local Agency. This credit is capped at $200 per day, up to a maximum of $10,000, per employee.
The overall tax credit for the combined amounts above cannot exceed 7.65% of the total wages paid for the business as a whole for that quarter.
One key to thing to remember with credits 1 through 3 is that these are for employees who were out of work and were still compensated. Working from home does not count as eligibility for taking these credits as no work can be provided to the employer to qualify for that hour. Now if an employee was paid for 8 hours of work, and only worked from home for 4 of those hours, then the remaining 4 hours would qualify for one of the above credits. Also, sick hours or paid leave deducted from the employee’s balance would not qualify for any of the credits as this is a duplicate benefit for the employer.
The Employee Retention Credit (ERC) was created via the CARES Act. This credit is likely to be the largest of the credits available to employers and also the most straightforward to calculate. All you need to do is take the employees wages, multiply by 50% and the amount remaining is your credit for that employee up to a $10,000 maximum. The credit is available for any employee who was out, but was continued to be paid by the employer. The amount calculated is a reduction of the payroll taxes paid in, or deposited each quarter. Therefore, this is the easiest and quickest way to access funds because you already have the money, and are reducing your normal payroll tax payment. The credit information should be relayed to your payroll provider before they run your payroll for that period to ensure the credit is taken out of the payroll tax payment they calculate.
To be able to qualify for the ERC, you must meet one of the following conditions:
- The operation of that business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the COVID-19 outbreak.”
- “Gross receipts that are less than 50% of their gross receipts for the same quarter in the prior year are also eligible, until their gross receipts exceed 80% of their gross receipts for the same calendar quarter in the prior year.”
If you have over 100 employees, then the credit is only available for the employees’ wages paid who are not working at all while the business is closed. If you have 100 or less employees, then all wages paid qualify for the credit if you meet one of the conditions above. For business still in operation, the credit is only available for the time period calculated by following the second bullet point above.
The Employee Retention Credit and the other three credits mentioned have the option to be advanced to you by the IRS by filing form 7200. This form will have the IRS deposit an advance amount into your business account now based on your expected future credits. “Employers can file the form for advance credits anticipated for a quarter at any time before the end of the month following the quarter in which the employer paid the qualified wages. Employers are permitted to file Form 7200 several times during each quarter.” This is a method that will get money needed to continue operations or pay employees earlier than would be available under the method where you exclude the credits from your payroll payments.
One last thing to note is that you can mix and match different credits for the best result, however you cannot duplicate the benefit by using two or more credits for the same period of time worked. You will want to choose one that maximizes the benefit for the situation that took occurred and utilize each to the maximum benefit for each employee’s situation.