Eligible employers can receive a refundable payroll tax credit of 50% of wages paid to employees between March 13th, 2020 and December 31st, 2020.
An eligible Employer may not receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act (“Paycheck Protection Loan”). An Eligible Employer that receives a paycheck protection loan should not claim Employee Retention Credits.
Eligible Employers Must Meet the Following Criteria:
Eligible Employers for the purposes of the Employee Retention Credit are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either:
- Fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experiences a significant decline in gross receipts during the calendar quarter.
Note: Governmental employers are not Eligible Employers for the Employee Retention Credit. Also, Self-employed individuals are not eligible for this credit for their self-employment services or earnings.
Definition of Qualified Employer Business
The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the operation can still continue to operate but not at its normal capacity.
A significant decline in gross receipts begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer’s 2020 gross receipts for the quarter are greater than 80 percent of its gross receipts for the same calendar quarter during 2019.
Example: A state governor issues an executive order closing all restaurants, bars, and similar establishments in the state in order to reduce the spread of COVID-19. However, the executive order allows those establishments to continue food or beverage sales to the public on a carry-out, drive-through, or delivery basis. This results in a partial suspension of the operations of the trade or business due to an order of an appropriate governmental authority with respect to any restaurants, bars, and similar establishments in the state that provided full sit-down service, a dining room, or other on-site eating facilities for customers prior to the executive order.
Employers who had 100 or fewer full-time employees in 2019, all employee wages are available for the credit calculation, regardless of whether the employee is still working or has been furloughed.
Employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or have reduced hours as a result of closure or reduced sales, are eligible for the credit.
Wages, including health benefits, are capped at the first $10,000.00 in wages paid. Wages paid for compliance with FFCRA (paid family and medical leave) are excluded from the credit calculation.
Example by an Individual Employee
Employee was employed during the period of March 13, 2020, and December 31st, 2020. The credit is allowed against the employer portion of social security taxes under section 3111(a) of the Internal Revenue Code (the “Code”)
Wages paid to employee thru this period meets the threshold of $10,000.00 and includes employer/employee contributions to health care costs.
Employer is eligible to a 50% credit against payroll taxes, equaling a $5,000.00 credit per employee.
The credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an Eligible Employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for qualified wages paid to any employee is $5,000.
Example 1: Eligible Employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the Eligible Employer for the qualified wages paid to Employee A is $5,000.
Example 2: Eligible Employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the Eligible Employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.
Taxes Eligible for Credit
Social security functions like at flat tax for all- regardless of how much income the employee receives. The single rate in 2020 is 12.4% until the threshold of $137,700.00 in wages is met. Half the tax is paid by the employer and half the tax paid by the employee.
So, for calculation purposes, you would start with the wages times 6.2% – to estimate the employer portion of the credit available.
About the Author
Jean Hagan, Principal
Jean has owned, operated, and consulted in the restaurant industry for more than 30 years. During that time, she worked with a well-known national chain; owned a food and beverage company that operated multiple restaurants, bars, and event spaces in the Squaw Valley area; and became the president, CEO, CFO, and shareholder of one of the highest-grossing restaurants in California. Today, Jean is Principal and leads the Restaurant Operations Consulting practice at KROST. » Full Bio