If your organization was not able to receive money through the Paycheck Protection Program, you may be able to claim an Employee Retention Tax Credit!
The CARES Act supports certain employers that operate a business during 2020 and retain their employees with an employee retention tax credit, despite experiencing economic hardship related to COVID-19. Like other eligible employers, qualifying not-for-profit employers can benefit from this credit. The credit is equal to 50 percent of wages paid to each employee, subject to a maximum per employee tax credit of $5,000. For a tax-exempt organization to qualify as an eligible employer, the organization must be described under 501(c) and exempt from tax under 501(a).
Who is eligible for the Employee Retention Tax Credit?
To be eligible, a not-for-profit employer must have been in operation during 2020 and either:
- Have operations fully or partially suspended due to orders from a government authority limiting commerce, travel, or group meetings in response to COVID-19
- Have a reduction in revenue of at least 50 percent, which is measured by comparing the applicable calendar quarter to the same quarter of 2019. However, when the employer’s gross receipts go above 80% of a comparable quarter in 2019, the employer no longer qualifies after the end of that quarter
The IRS plans to issue future guidance on how a tax-exempt employer can determine whether it experienced a significant decline in gross receipts, but they do note that it will be inclusive of all operations.
The credit is available for wages paid or incurred from March 13, 2020, through December 31, 2020.
How do you calculate qualified employee retention wages for the Employee Retention Tax Credit?
This credit is calculated quarterly. It is 50% of qualifying wages paid, up to $10,000 per employee in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages are not limited to cash payments, but also include a portion of the cost of employer provided health care.
What are qualifying wages for the Employee Retention Tax Credit?
Qualified wages are wages and compensation are both determined without regard to the contribution and benefit base, paid by an Eligible Employer to some or all of its employees after March 12, 2020, and before January 1, 2021. Qualifying wages are based on the average number of a business’ employees in 2019.
- For employers with 100 or fewer employees, the credit is based on wages, including health care costs, paid to all employees, regardless if they worked or not during the period operation were suspended or a period of decline in gross receipts. If the employees worked full-time and were paid for full-time work, the employer still receives the credit.
- For employers with more than 100 employees, the credit is allowed only for wages, including health care costs, paid to employees who did not work during the calendar quarter. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
How do you claim the Employee Retention Credit?
Beginning with the second calendar quarter of 2020, to claim the credit, employers should report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. The IRS updated the 2020 Form 941 and its instructions. The form and the instructions themselves have no substantive changes, however, the IRS added a page preceding the form and instructions that addresses the employee retention tax credit established under the CARES Act due to the current coronavirus (COVID-19) public health emergency.
The preceding page accompanying the Form 941 and its instructions state that employers should not report a credit for 50% of qualified wages paid from March 13, 2020 through March 31, 2020 on the first quarter Form 941, 941-SS or 941-PR. The IRS instructs that qualified wages paid from March 13, 2020 through March 31, 2020 must be reported on the second quarter Form 941 along with qualified wages paid from April 1, 2020 through June 30, 2020 for the employee retention tax credit.
The method most employers will likely utilize to get an immediate benefit is by reducing their federal employment tax deposits by the amount of the credit. Then they will account for the reduction in deposits due to the Employee Retention Credit on the Form 941. The IRS recently released Notice 2020-22 where they stated the various instances where they would waive failure to deposit penalties in regards to employers taking the retention credits.
If employers do not have enough federal employment taxes to cover the amount of the credit, after they have deferred deposits of employer social security taxes under the CARES Act, they may request an advance payment of the credit from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Example: An eligible employer paid $10,000 in qualified wages, including qualified health plan expenses, and is therefore entitled to a $5,000 credit, and is otherwise required to deposit $8,000 in federal employment taxes, including the taxes withheld from all of its employees, for wage payments made during the same calendar quarter as the $10,000 in qualified wages. The employer has no paid sick or family leave credits under the Families First Coronavirus Response Act (FFCRA). The employer may first defer the employer’s share of social security tax imposed on the wages, then may retain up to $5,000 of the other employment taxes it was going to deposit, and it will not owe a penalty for keeping the $5,000. The employer will claim the credit and reflect the reduced liability for the $5,000 when it files Form 941.
What are the limitations for the Employee Retention Credit?
- Qualified wages, including health care costs, are capped at $10,000 per employee regardless of the number of employees.
- Qualifying wages cannot include wages that the employer received a credit for paid sick leave or paid family leave under the FFCRA. Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit (WOTC)for the employee.
- Wages counted for the employee retention may not be counted toward the tax credit for providing paid family and medical leave.
Waiver of Penalties
IRS can waive applicable penalties for employers who do not deposit applicable payroll taxes in anticipation of receiving the credit [CARES Act, Sec. 2301(k)].
If you have any questions, be sure to reach out to our leaders here! Please remember that it will be important to check back often for updates and changes to the application process.