During the coronavirus pandemic, helping Americans keep their job has been a major focus for Congress. Both the Families First Coronavirus Response Act (FFCRA), signed into effect on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provide payroll-related credit to help small businesses to maintain and pay their employees.
FFCRA requires certain employers to provide sick pay and paid family leave to employees who are on leave related to COVID-19. On the flip side, FFCRA provides dollar-for-dollar refundable tax credits to employers for these payroll costs.
The CARES Act does not require employers to pay or keep their employees. However, it does introduce a payroll credit in order to encourage employers to keep employees on payroll as much as possible throughout the pandemic. The CARES Act introduces the Employee Retention Credit, which provides a credit calculated at a fraction of payroll costs.
Below is a comparison chart of the major differences between the credits offered by the two Acts:
| COVID-19 Payroll Tax Credit under FFCRA | Employee Retention Credit under CARES Act |
|---|---|
| Who is an eligible employer? | |
| Businesses and tax-exempt organizations that have fewer than 500 employees. | Eligible Employers are those that carry on a trade or business during the calendar year 2020, including a tax-exempt organization, that either:
|
| What is the amount of credit? | |
| The credit covers 100 percent of up to ten days of qualified sick leave wages, and up to ten weeks of qualified family leave wages that an employer paid under FFCRA. The credit also covers qualified health plan expenses allocable as well as employer’s share of Medicare taxes imposed on these wages.2 | The credit is 50% of qualified wages capped at the first $10,000 in qualified wages paid by eligible employers to each eligible employee. |
| What are qualified wages? | |
| Qualified wages are qualified sick leave wages and qualified family leave wages an employer is required to paid under FFCRA.
Wages that are taken into account for IRC 45S (employer credit for paid family and medical leave) are excluded. For the definition of qualified sick leave wages and qualified family leave wages, please refer to our article: https://www.krostcpas.com/news/families-first-coronavirus-response-act |
Depending on the size of the employer, qualified wages are wages paid to employees between March 13, 2020, and December 31, 2020. Qualified wages include qualified health plan expenses that are properly allocable to the wages.
For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible, regardless of whether the employee is furloughed. For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours as a result of their employer’s closure or reduced gross receipts are eligible for the credit. Wages that are taken into account for the payroll credit under FFCRA and IRC 45S (employer credit for paid family and medical leave) are excluded. |
| How do I claim this credit? | |
| Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return.
Eligible Employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld from employees, and both the employer’s and employees’ share of social security and Medicare taxes in anticipation of receiving the credit. |
Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return.
Eligible employers can reduce their required federal employment tax deposits in anticipation of receiving the credit. |
| What if I don’t have sufficient funds to pay wages, can I request an advance of the credit? | |
| Yes. Employers may request an advance of the credit by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The Eligible Employer will account for the amounts received as an advance when it files its Form 941, Employer’s Quarterly Federal Tax Return, for the relevant quarter.
Form 7200: https://www.irs.gov/pub/irs-pdf/f7200.pdf |
Yes. Employers may request an advance of the credits by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Form 7200: https://www.irs.gov/pub/irs-pdf/f7200.pdf Note: Since the credit is only 50% of qualified wages, do not file Form 7200 to request advance if the anticipated credit does not exceed required employment tax deposits. If you file the Form 7200, you will need to reconcile this advance credit and your deposits with the qualified wages on Form 941 and you may be subject to penalty for underpayment of federal employment taxes for the quarter. |
| Is credit available to self-employed individuals? | |
| Yes. | No. |
| If I am an eligible employer under both Acts, can I receive both credits under FFCRA and CARES Act? | |
| Yes, but not on the same wages. | Yes, but not on the same wages. |
| If I received Small Business Interruption Loan under the Payroll Protection Program authorized under the CARES Act, can I receive this credit? | |
| Yes. However, if an eligible employer receives tax credits for qualified leave wages, those wages are not eligible as “payroll costs” for purposes of receiving loan forgiveness under section 1106 of the CARES Act. | No. |
1The credit period ends in the quarter following the quarter, where gross receipts are greater than 80% of the gross receipts for the same quarter during 2019.
Example: An employer’s gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020, respectively. Their gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019, respectively. Thus, the employer’s 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus the employer is entitled to a retention credit with respect to the first and second calendar quarters.
2Only Medicare tax, which is 1.45% of wages, is included. There is no credit for the employer portion of social security tax because qualified leave wages are not subject to this tax.
For more information, you can refer to the FAQs provides by IRS:
https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
About the Author
So Sum Lee, CPA, Principal
Tax, Real Estate, Technology, Hospitality
So Sum Lee, CPA is a Tax Principal at KROST. So Sum has over 18 years of experience in public accounting and has a wide range of experience in Taxation, as well as servicing high-net-worth clients. So Sum’s area of expertise includes industries such as wholesale, Real Estate investments, and Restaurants. » Full Bio