The programs in the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed by Congress are intended to assist business owners, as well as small businesses, certain non-profits, and other employers with whatever needs they have right now. Among the implementations of the CARES Act are the Paycheck Protection Program (PPP) and the Employee Retention Credit. Both measures help businesses keep their workforce employed during the COVID-19 crisis.
The Paycheck Protection Program (PPP) Loans provides cash-flow assistance through 100% federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll, the loans would be forgiven, which would help workers remain employed, as well as help affected small businesses and our economy snap-back quicker after the crisis. The PPP offers:
1) forgiveness of up to 8 weeks of payroll based on employee retention and salary levels
2) no SBA fees
3) at least 6 months of deferral with maximum deferrals of up to a year
Small businesses and other eligible entities are able to apply if they were harmed by COVID-19 between February 15, 2020 and June 30, 2020, and would be retroactive to February 15, 2020, in order to help bring workers who may have already been laid off onto payrolls. Also, the loans are available through June 30, 2020.
If you don't qualify for a PPP Loan, you can consider the Employee Retention Credit.
Employee Retention Credit
The Employee Retention Credit is available to employers whose operations were totally or partially suspended as a result of COVID-19, or suffered a reduction of 50% or more on business income compared to the same period during last fiscal year (in this last scenario, employers will be eligible for this benefit until their sales are at least 80% of the earlier for the same month during the previous fiscal year, or December 31, 2020). It is a fully refundable tax credit for employers, equal to 50% of qualified wages (including allocable qualified health plan expenses) that Eligible Employers pay their employees. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
What are “qualified wages”?
Qualified wages are wages (as defined in Section 3121(a) of the Internal Revenue Code (the “Code”)) and compensation (as defined in Section 3231(e) of the Code) paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021. Qualified wages include the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages.
The definition of qualified wages depends, in part, on the average number of full-time employees (as defined in Section 4980H of the Code) employed by the Eligible Employer during 2019.
If the Eligible Employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for the time that the employee is not providing services due to either: (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee, may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. If the Eligible Employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.
Who is an Eligible Employer?
For the Employee Retention Credit purposes, are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either:
§ Fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
§ Experiences a significant decline in gross receipts during the calendar quarter.
Note: Governmental employers are not Eligible Employers for the Employee Retention Credit. Also, self-employed individuals are not eligible for this credit for their self-employment services or earnings and the CARES Act does not require employers to pay qualified wages.
Which wages qualify?
Qualifying wages are based on the average number of a business's employees in 2019.
§ Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full-time and were paid for full-time work, the employer still receives the credit.
§ Employers with more than 100 employees: If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.
If you are an Eligible Employer, how do you receive the credit?
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit. The credit is allowed against the employer portion of social security taxes under Section 3111 (a) of the Code.
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 or 941-PR beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
In addition, Eligible Employers may elect to not claim the credit for the Employee Retention Credit. (The FFCRA does require certain employers to pay sick or family leave wages to employees who are unable to work or telework due to a COVID-19 circumstance. These employers may be entitled to a refund tax credit for those wages paid, although the employers may elect not to claim the credit.)
At Carbonell and Co., LLP, we are committed to provide assistance and guidance to our clients and their families in these crucial and trying times. Should you have any questions or comments, please do not hesitate to contact us.