Employee Retention Credit under The CARES Act – Part 2
This is a continuation of yesterday’s message, to finish our research on the Employee Retention Credit. If you were unable to read it or want to use it as a reference as you go through this new material, it can be found at
Against what Employment Tax does the Employee Retention Credit apply?
The credit is allowed against the Employer Portion of Social Security Taxes. This has nothing to do with any State Withholding Taxes. Nor does it have anything to do with Federal Withholding or any Federal or State Unemployment Taxes. Nothing has changed on any of those.
How does an Eligible Employer claim the refundable credit?
This is where it gets complicated. There is an enormous amount of extremely complicated tax law at work. Rather than trying to explain all of that, I will explain this from a purely operational standpoint.
Example 1) An Eligible Employer paid $10,000 in qualified wages, not including the rest of it’s payroll for the quarter, and is therefore entitled to a $5,000 credit. Under normal circumstances, the Employer would have deposited $8,000 for the entire payroll with that quarter’s 941. Instead they only need to make a payment, given the normal deposit due dates, of $3,000. If that is accomplished, then there is no penalty. If they miss the due dates, then there will still be a penalty associated with the Failure to Deposit.
Example 2) An Eligible Employer only has one employee, who is the owner of the company. That owner decides to pay themselves $10,000 inside the quarter in eligible wages and is therefore entitled to a $5,000 credit. The normal deposit with their 941 is only $3,000. This deposit does not need to be made with the 941 for that quarter. In addition, we can request a refund of the remaining $2,000 by filing Form 7200.
Instructions for Form 7200 as well as the form itself, can be found here.
May an Eligible Employer receive both tax credits for the qualified leave wages under the FFCRA and the Employee Retention Credit under The CARES Act?
Any amount that you claim under one, cannot be claimed under the other. You cannot claim both for the same payrolls.
Additional Information about the Employee Retention Credit can be found here.
We are getting a lot of requests from you asking, “What is best for my business?”. I have thrown a lot of information at you, and there is a lot more to come. But here is a quick summary. It is by no means comprehensive. There are four major things to consider.
1 – The Families First Coronavirus Act provides a refundable credit for paid leave for your employees.
2 – The Payroll Protection Plan is an SBA Loan which provides for 10 weeks of your normal payroll and an additional 25% for operating costs. The loan can be forgiven and turns into a grant if you use it for its intended purposes inside the correct time frame.
The good thing about this one is that it is easy to qualify for it, and the terms are exceptional, even if you don’t get the credit on the back end because you use it for something not on the approved list.
The bad part about this is that it presumes that you have some money to work with in the first place. Also, you need to apply for this. They might say no. They also might take two or three weeks to say no. If they do say yes, then we still have no clear idea when they will start closing and funding the loans. The SBA hasn’t yet even provided their lenders with the language necessary for the loan documents, so that a lender could do a closing in the first place.
3 – The Employee Retention Credit is a 50% credit per employee on up to $10,000 in payroll for eligible employers from March 12, 2020 through January 1, 2021. You don’t have to apply for this one. This is a credit that you take on your 941. It is also refundable.
But let’s remember that you cannot do both a Payroll Protection Plan Loan as well as take the Employee Retention Credit. You need to choose one or the other. Also, you may not qualify for this credit. What if your business was not fully or partially shut down? What if your business has not suffered a 50% loss in business over a quarter? This also presumes that you have enough money left in your business to pay for employees in the first place.
4 – There’s always unemployment benefits. I will be writing in depth about this tomorrow. As part of The CARES Act, they were supposed to increase unemployment benefits by $600 per week. But, I have been told that The Federal Government has not yet actually given this money to the states, so the boost in unemployment benefits has not yet occurred.
The best thing about this is that it doesn’t cost any money, and is certainly the best way to preserve your cash. This isn’t a loan that you might not receive. This isn’t a credit that you would have to wait to receive until after you have paid wages and filed your 941. You lay people off, they collect, and you will preserve your cash.
Later on you will have an increased percentage that you will need to pay for unemployment, but this would certainly help get you through these difficult times.
Either way, you will need to let me know what you want to do, so that we can properly prepare your 1st Quarter 2020 Payroll Tax Returns.
We’re right in the middle of this mess, and I know that most of you are afraid of a lot of things. You need to keep your head clear, so that you can make the decisions necessary, to keep your businesses going.
No matter what happens, you need to get through this, and we are here to help.
Accounting Solutions Ltd. stands ready to fulfill its purpose and mission of protecting you, your family, and your business. If you need anything at all, or even just need to talk, we stand ready to serve. I’m here, and remain,
Accounting Solutions Ltd.
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