Posted by Fred Lake

Employee Retention Credits – An Alternative to Paycheck Protection Loans for Businesses

Employee Retention Credits – An Alternative to Paycheck Protection Loans for Businesses

The entire world is battling with the unseen enemy, and nations around the world are coming up with new policies to help the citizens. In response to the financial hardship that the virus has brought, the new tax credit has come up. The entire country, including families and businesses, can get some relief to cushion the effect of the pandemic. This is known as the Employee Retention Credit, a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

With the employee retention credit, employers that qualify can get credit for the wages they pay during the COVID-19 lockdown. Non-essential businesses that have been shut down will be paid some money. 

There are some vital points to note before we proceed.

    •    It is important to note that taxpayers that have taken advantage of the Paycheck Protection Program cannot use the Employee Retention Credit again.

    •    All employees getting a Work Opportunity Tax Credit under an employer cannot qualify for the Employee Retention Credit as well. 

    •    Wages that were used to calculate family leave tax credit and paid sick leave from the Families First Coronavirus Response Act does not qualify to be used in the Employee Retention Credit.

Eligibility for Employee Retention Credit

With the notes above, all employers come in two categories. The criteria for their classification is the number of full-time employees

Businesses with full-time workers less than 100

All businesses that have full-time employees less than 100 can claim the credit on wages they paid between March 12, 2020, and Jan 1, 2021. This is applicable in the quarter they have had to suspend operation. By the suspension of operation, we mean they had to cease all business activities fully or partially in response to a lockdown order from the authority because of the COVID-19 outbreak.

Businesses that had a massive decline in receipts also qualify. This happened when there was at least a half decline in gross receipts when compared to the previous years' quarter. This credit will save the day until the gross receipt rise above 80% of the gross revenue when considering the last year's quarter.

Businesses With Over 100 Full-Time Workers 

For a business with more than 100 full-time workers, they cannot just claim the credit. This is because the credit only applies when operations are closed.

How the Credit Works

Employers that qualify will get credit to take care of employment taxes. This applies to each calendar year. There was a suspension order or reduction in receipts (50% of qualified wages). This, however, is limited to $10,000 per worker.

Health plan expenses that qualify like the funds scheduled to maintain a group health plan can be classified as qualified wages. 

For each employee, there is a maximum credit allowance of $5000. The employer will get a refund for all excess employment tax available

Process for claiming the credit 

To claim the employee retention credit, it can happen in either of three ways:

    •    Filing Form 941 - Employer’s Quarterly Federal Tax Return. This credit will be added earlier so you can fill the second quarter form for 2020. All qualified wages paid between March 12 and March 31 will appear on the second quarterly tax form

    •    You can also reduce the federal tax deposit required using the credit you expect. This also includes taxes from workers. 

    •    Completing form 7200 to qualify you for an advance on the credit. You should only use this method if the credit you expect is more than the required federal tax deposits. 

Each filing method is unique and comes with various implications. Be sure to consult an expert to help you with the decision. Some businesses are paying their workers during the lockdown period, even when they do not qualify for or chose not to consider a Paycheck Protection Program loan.

Fred Lake
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