Qualifying for the Payroll Tax Credit

The COVID-19 pandemic has caused many small- and mid-sized businesses to rethink their business plan and reshape their future. While some companies have adapted to the new normal and found a way to thrive through these difficult times, others haven’t been so fortunate.

One of the many challenges businesses are faced with today is employee retention, proving to be near-impossible in some industries. For those that continue to fight through the new normal, there’s a good chance you qualify for a payroll tax credit thanks to the CARES Act, also known as the Coronavirus Aid, Relief, and Economic Security Act.

The Employee Retention Credit is just another way the government is looking out for businesses of all sizes throughout these tough times. This will grant your business relief and incentivize businesses to keep employees by providing a tax credit to such businesses.

How Do You Qualify?

The Employee Retention Credit is designed for businesses that have been fully or partially suspended during the COVID-19 pandemic — from March 12, 2020 to January 1, 2021. Since most commerce, travel, and group meetings were limited by government order, a majority of businesses have likely seen a disruption.

When comparing your quarterly receipts from 2019, you’ll have to prove that you have seen a reduction of at least 50% in order to qualify. Either that, or you need to prove that you had to shut down during the quarter. You will continue to receive that credit up until your numbers have recovered up to at least 80% compared to 2019.

Unfortunately, those that are self-employed won’t be eligible. Those that are or have taken part in the Paycheck Protection Program won’t be eligible either, though you will still be able to sign up for other loans provided by the SBA — such as the Economic Injury Disaster Loans.

Which Wages Are Eligible?

Not all employee wages will be eligible for the payroll tax credit and it will largely depend on how many employees you had in 2019. Businesses that had more than 100 employees will only be allowed to count wages earned by employees that saw a reduction in hours worked.

On the other hand, businesses that had less than 100 employees in 2019 will be able to count any wages earned by any employee.

Whether you had more or less than 100 employees, you can only count the first $10,000 of wages earned each quarter per employee. Since the credit is for 50% of wages earned, the most you can claim per employee is $5,000.

For example, a business with 20 employees that all earn $15,000 per quarter will be eligible for a payroll tax credit equal to $100,000 (20 employees at $5,000 each). Likewise, a business with 20 employees where only half of them make at least $10,000 per quarter will only be eligible for a tax credit of $50,000.

Advanced Payments and Refunds

One of the biggest benefits of the Employee Retention Credit is the fact that it’s refundable. If there’s a portion of the payroll tax credit that you don’t need, it will be refunded to you in cash. It’ll basically be viewed as an over payment of payroll taxes.

Going quarter-by-quarter, businesses might be eligible for an advanced payment or advanced refund if the quarter’s credit exceeds the amount of payroll taxes due for that quarter. These can be requested by filling out Form 7200, also known as Advance Payment of Employer Credits Due to COVID-19.

You will also have the option of filing it normally on Form 941, but some businesses simply can’t wait and need those funds now.

We understand how confusing this can be for most businesses, especially since you have so much on your plate right now. If you need help determining whether or not your business qualifies for the Employee Retention Credit, contact our firm today. This could be the break you’ve been waiting for.