The CARES act used to help businesses during the pandemic has an employee retention credit, which is a refundable tax credit for those “qualified wages” that were paid to workers that are kept between March 13 and December 31. The purpose of this is to encourage these employers to keep the people on payroll, even if not working because of the effects of the coronavirus. Here is what you have to know about it.
This offers a 5K refundable credit for every employee that you keep on payroll between now and December 31, 2020. You can qualify if you were ordered to fully or even partially shut down, and the gross receipts fell below 50% in that same quarter during 2019. If you claim your credit, you reduce the payroll taxes that are sent to the IRS. If you exceed this, you can get a direct refund from the IRS itself. You should compare this however with the PPP since you can’t do both of these. But, since the PPP applications are suspended due to the lack of funding, this is definitely something to consider.
How does this work? Well, for example if you’ve got a restaurant that was ordered to close to sit down customers but allowed for other operations, this does give qualify you for the credit since it was a partial shutdown. You are qualified for any quarter during this is applied, up to each of the quarters in 2020. This decline in gross receipts is a test that applies to the business and whether they were affected. A qualified period does begin in the quarters where the receipts are less than 50% of the receipts that are in the same quarter, and it ends the first calendar quarter after which the gross receipts were higher than for that quarter in the previous year.
Basically, what this means is that you qualify if the business does do less than the previous quarter of 2019.
Self employed people, those who work for the government, or any small business that did get a PPP loan aren’t eligible for this. the wages that you received for the tax credit for paid sick and family leave that was under the Family First Coronavirus Response act also don’t qualify. Any wages that you count for this can’t be counted as part of the credit for medical leave or paid family. Any employee who was granted a work opportunity tax credit also isn’t qualified.
This also doesn’t apply to any part-time employees, just the full time ones.
In order to get this, you need to advance payment the balance from the IRS, depending on the total amount of the credit. You should look at the credit for the quarter and from there reduce the form 941 by that amount. For example, if the credit was 10K in Q1 2020, then the amount that you should do is 15K. however, you reduce that by 10K to 5K and from there, you account that to the credit.
From there, if the Q1 exceeds the amount withheld, then you can receive the advance payment, and you can do so in the form called form 7200.
You can’t take advantage of the PPP and this one, however. But, since the PPP is tapped out, this might be a good option, and this could help you figure out the choices to make in all of this.