Employee Retention Credit
By Gary Rose, Partner, Tax Services
Healthcare businesses have been challenged to meet their patients’ needs during the COVID-19 pandemic, operating under unchartered conditions and new constraints essential to serve and protect their patients. Economically, some sectors of the healthcare industry have incurred escalating payroll and medical supply costs resulting from these extenuating operating restrictions, while for other sectors, patient service capacity and the corresponding revenue has declined precipitously. The federal government has provided various forms of supplemental financial support to healthcare businesses to help offset some of the shortfall, including stimulus payments, forgivable loans and tax credits for those continuing to pay their employees and serve their patients.
Beginning in July 2020, qualifying employers subject to full or partial closure due to COVID-19 will be able to claim a refundable payroll tax credit. The Employee Retention Credit (ERC) is included on IRS Form 941, Employer’s Quarterly Federal Tax Return, which reports employee wages and withholdings and employers’ share of Social Security and Medicare taxes. The second quarter filing is the first period in which the credit can be claimed, and the Form is due July 31, 2020. Several conditions must be satisfied in order to receive the credit.
Employee Retention Credit
The ERC is available to all qualifying employers (regardless of size) and includes tax-exempt organizations with two exceptions: (i) state and local governments and their instrumentalities, and (i) small businesses that have received CARES Act small business loans.
A qualifying employer is one that either:
- Had its business fully or partially suspended by government due to COVID-19 during the calendar quarter; or
- Whose gross receipts are below 50% of the comparable quarter in 2019. In this latter case, the employer remains qualified until gross receipts rise above 80% of the comparable 2019 quarter, and qualification ends in the following quarter.
Note: Healthcare providers are considered “essential businesses” in many states and, therefore, were not subject to full or partial suspension of operations if the governmental order allows the employer to remain open, even though the governmental order requiring non-essential businesses to close may have an effect on the employer’s operations. These healthcare businesses, nevertheless, may qualify under the significant decline in quarterly gross receipts test if their business activity level was materially curtailed.
The credit is equivalent to 50% of qualified wages paid to an employee from March 13, 2020 through December 31, 2020 (not to exceed $10,000 of wages for all quarters, or $5000 maximum). The qualifying wages also include a portion of the cost of employer-provided healthcare.
The computation of the credit depends on the average number of employees in 2019:
- Employers with fewer than 100 employees in 2019 can take the credit on wages to all employees (whether working or not).
- Employers with 100 or more employees in 2019 can take the credit only for wages paid to employees who did not work during the calendar quarter.
In determining the number of employees, aggregation rules under the pension plan rules apply, which include controlled groups of corporations, commonly controlled businesses, affiliated service groups, and certain management companies.
The common-law employer of individuals of wage is entitled to the benefit of the Employee Retention Credit (or paid sick leave or family and medical leave) even if the wages are paid through a third-party provider (e.g., a payroll service provider, professional employer organization (PEO) or certified professional employer organization (CPEO) or other agent.
More information about the Employee Retention Credit and other new employer credits available in employers’ second quarter 2020 Form 941 filing can be found in IRS Publication 5419, New Employer Tax Credits, and on the IRS website at: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
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