The updated FAQs for Employee Retention Credit and Form 941

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The Paycheck Protection program has been a significant relief for small businesses to fight the COVID-19 pandemic. But apart from the PPP, there is another relief program that can help struggling businesses in these uncertain times. The opportunity that is not much known around the country is the Employee Retention Credit (ERP), which is a part of the CARES Act, and just like PPP, it helps small businesses continue keeping their employees on the payroll. 

A distinct feature about the ERP is that unlike the PPP, it is not a loan; it is a refundable tax credit. It would be calculated every calendar quarter for wages paid after March 12, 2020, and January 1, 2021. What this means is that the ERP would be available to help small businesses in the 2nd, 3rd, and 4th quarters of 2020 and a part of the 1st quarter as well. 

The amount of credit under the ERP is 50% of the qualifying wages paid up to $10,000 per employee for all the above mentioned quarters. Also, the qualifying wages may not exceed $5,000 or 50% of the $10,000 for any employee for any of the calendar quarters. 

What this means is that there is no application, no fees, and no delays, but there are some rules that you must be aware of. These include:

  • Possibility of a full or partial suspension of operations during any calendar year in 2020 as per orders from an appropriate government authority limiting commerce, travel, group meetings for commercial, social, religious, and other purposes because of COVID-19. Or
  • In case of experiencing a reduction in gross receipts during the calendar quarter.

The IRS also highlighted here that any business that voluntarily shuts operations or reduces working hours without any government mandate would not be eligible for ERC. But, the business may still be eligible for an ERC if they experience a significant decline in gross receipts. 

The significant decline in gross receipts is fathomed by comparing the gross receipts of the 1st calendar quarter in 2020 with the gross receipts of the same quarter in 2019. If it is less than 50%, then the decline is considered significant. 

The IRS again updated its website in the last week to give out an update on what constitutes wages to calculate the ERC. The qualifying wages include payments along with the employer-provided healthcare to its employees. But the question here is that what if the employees are not currently working but still receiving the employer-provided healthcare benefits. 

The IRS clarified that employers with not more than 100 employees or less may treat the payments towards such health coverage as qualified wages even if the employees are not working and respectively not getting paid because of such discontinuation.

However, if you are an employer who has more than 100 employees may not be able to include healthcare charges as qualifying wages if your employees are receiving wages. Only heath expenses of the period where employees are not working can be included as qualifying wages under the ERP. 

For example, if you had 20 employees in 2019 and now have stopped working because of governmental orders. You continue paying your employees half their wages and their health coverage. In this case, you can include the cost against their health coverage as wages as per the ERC.

In contrast to this, if you had 1000 employees in 2019, it would be a bit of a different scenario. Cost against healthcare benefits can be included as qualifying wages when you are paying half your employee’s salaries when they are not working and not when the same amount is being paid when your office is functional. 

Another update is that earlier individual could not claim an ERP while also availing the benefits of the PPP. The latest update has it that employers who avail the PPP and pay the amount back by May 14, 2020, will be considered as though they had not received the PPP when they also opt to avail the ERC. 

You can report this credit on Form 941, Employers Quarterly Federal Tax Return, and receive your share of the governmental support. 

The Bottomline

The government is making efforts to support small businesses from diluting because of the COVID-19 pandemic. The ERC comes as additional support to employers still supporting their employees in these trying times. It is important that we keep tabs on essential updates because there are many and would help you claim benefits from the COVID-19 relief program. In case you wish to know more about the ERC, and discuss other relief programs for small businesses, feel free to get in touch with your MyTaxFiler expert at 

Published on 5/14/2020

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