Advantages of the Employee Retention Credit Payroll Tax Deferral

The Employee Retention Credit, or ERC, is designed to help businesses keep employees on the payroll. It's not a loan, but it is a refundable tax credit - which means that you can get money even if you don't owe. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.There's not a lot of extra to do: and the forms 941 are already updated. This deferral option isn’t available if the taxpayer had debt forgiven under the CARES Act for certain SBA loans, such as the Paycheck Protection Program loan.

Here’s how it works:

Businesses may delay paying the employer portion of the Social Security payroll taxes on wages paid for the period from March 27, 2020, through December 31, 2020. Any 2020 deferred payroll tax amounts would be due to the government in two installments:

1. One-half at the end of 2021.
2. The remaining one-half at the end of 2022.

 
NOTE: This deferral applies to the 6.2% Social Security (old age, survivors, and disability insurance tax) portion of the employer’s obligation. Self-employed people are allowed to defer 50% of their Self-Employment Contributions Act (SECA) tax payment, including any related estimated tax liability. The deferral does not apply to the employee’s portion of the Social Security tax or the 1.45% Medicare tax.

Advantages of the employer portion of Social Security payroll deferral:

• It helps cash-strapped companies with cash flow.
• No interest or penalties will be charged, per IRS Notice 2020-22.
• It applies to all businesses; a business does not need to be adversely affected by COVID-19.
• No application is needed; the deferral is reflected on the quarterly filing of IRS Form 941, Employers Quarterly Federal Tax Return.
• The business can use the money for other purposes.

Disadvantages of the payroll deferral:

• If a business does not need to defer payroll taxes, but chooses to, they may not have the funds when it’s time to pay.
• This deferral option isn’t available if the taxpayer had debt forgiven under the CARES Act for certain SBA loans, such as the Paycheck Protection Program loan.
 
Frequently Asked Questions:

Does my business qualify to receive the Employee Retention Credit?

The credit is available to all employers regardless of size, including tax-exempt organizations. Just not to businesses who had debt forgiven under the CARES Act for certain SBA loans. Employers must fall into one of two categories:

1. The business is fully or partially suspended by government order due to COVID-19 during the calendar quarter.
2. The gross receipts are below 50% of the comparable quarter in 2019. Once the employer's gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

How is the credit calculated?

The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer provided health care.

How do I know which wages qualify?

Qualifying wages are based on the average number of a business's employees in 2019.

Employers with less than 100 employees: If the employer had 100 or fewer employees on average in 2019, the credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full time work, the employer still receives the credit.
Employers with more than 100 employees: If the employer had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees who did not work during the calendar quarter.

How do I receive my credit?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

CONTACT US: We can assist you in evaluating your available financial options and whether to defer the employer portion of Social Security payroll taxes is right for you. We provide other business and financial consulting services that you might find helpful at this time. Email us at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .