There’s a lot of attention right now on programs like the Paycheck Protection Program and disaster loans offered by the Small Business Administration. Those options were meant to help business owners receive immediate funding as a crisis management strategy resulting from COVID-19. But there’s another big federal benefit that may apply to you: The Payroll Tax Credit (also known as the Employee Retention Credit).
1. The payroll credit is part of the federal response to the pandemic.
Are you asking yourself what is payroll tax relief? Or what is a payroll tax credit? As part of one of the numerous pandemic-related stimulus bills passed by Congress in March, the Payroll Tax Credit, otherwise known as the Employee Retention Credit, is a way to receive funding from the government. Eligible businesses must have been impacted by COVID-19 between March 12, 2020 and January 1, 2021. The intention of this credit is to help keep employees on the payroll for as long as possible by providing some tax incentives to employers. Non-profits also qualify, but self-employed individuals do not. Can owners of S-corporations, independent contractors or self-employed people apply for the payroll tax credit? Yes, as long as you have employees and you file a quarterly Federal 941 return. There’s no need to apply though. You just take the credit at the time of filing the return. A new 941 return will have a new line on it for you to do the calculation.
2. The credit only applies if you don’t take money from the Paycheck Protection Program.
Because the credit is intended to provide additional subsidies to help employers maintain payroll levels, you can not apply for it if you’ve already opted in to the Paycheck Protection Program, which offered low cost forgivable loans that also cover payroll expenses. You are, however, eligible to apply for other types of loans, like the Economic Injury Disaster Loans, from the SBA. Also remember this is not a loan. It’s a credit against the employer’s share of FICA (6.2%) owed on your quarterly payroll.
(To get started applying for your Employee Retention Credit refund, visit Accelerate Tax’s website. They specialize in helping businesses maximize their refund.)
3. The payroll tax credit is in addition to the tax credit for Emergency Family Medical Leave.
This credit is not to be confused with the tax credit under the Families First Coronavirus Response Act (which includes Emergency Family Medical Leave provisions). This article is not intended to go into detail on that legislation, but know that if you’re paying for your employees to take time off for themselves or their families as a result of COVID-19, you’re also entitled to an additional credit to help you afford those expenses. You can use both tax credits, but just not for the same wages. You can learn more about the Families First Legislation on The Hartford’s Paid Family and Medical Leave Resource Center.
4. You must show your business has been significantly harmed by the pandemic.
To be eligible for this paycheck credit, you must demonstrate that either your business had to shut down during a payroll quarter because of the pandemic (as a result of a government order), or that your business suffered a 50% or greater loss of revenue during the quarter when compared to the previous year.
5. The credit is quite generous.
The credit is 50% of up to $10,000 of each employee’s wages (including healthcare premiums) each quarter through December 31, 2020. In other words, it’ll likely be $5,000 per employee each quarter, assuming they make more than $10,000 that quarter. So, if you have ten employees, you’ll get a $50,000 credit against your payroll taxes that quarter. If you had more than 100 full time employees in 2019, you include only full time workers. If you had less than 100 full time employees in 2019, you can include both full time and part time workers.
6. The credit is taken on your payroll tax returns.
This is not an income tax credit. It’s a payroll tax credit. That means you can take it against the employer’s share of FICA you owed during the eligible quarter when you do quarterly Federal 941 payroll tax returns.
7. The big news: it’s refundable!
More importantly, it’s refundable, which means that whatever portion of the credit you don’t need will be considered an over-payment of payroll taxes and will be returned back to you as cash.
8. You can also reduce your tax deposits.
If you think that you’ll be qualifying for the credit during a quarter, the IRS will allow you to hold back on your tax deposits so that you’ll have more cash available, rather than waiting for them to send you the cash back after you file your 941.
This payroll tax deduction in 2020 may not be for everyone, but it’s certainly applicable for your business if you’re not receiving any other aid. If that’s the case, it could be a substantial cash infusion from the government and may make the difference for your company’s survival. Talk to your accountant and payroll company to make sure you’re taking advantage!
Next Steps: Apply for your ERC refund today with Accelerate Tax. They specialize in helping businesses maximize their ERC refund.
View Comments (176)
Great article! This informative piece explains the valuable Payroll Tax Credit, offering crucial support to businesses affected by the pandemic. Well-structured and easy to grasp, it's a must-read for entrepreneurs seeking financial relief in these challenging times. For practical assistance, consider SecurePayStubs, a resource that helps small businesses in the US create accurate pay stubs for employees and contractors instantly, complete with precise tax calculations for federal and all 50 states.
Do filing amended 941 forms for previous quarters impact an employee's w-2?
No it doesn't.
Filed form 7200 last week. Trying to understand from others that have filed how long you have seen it take to get your refund? Aside from the fax #, IRS offers no other contact information where you can call and check. Thanks for any thoughts you can share.
You cannot use the tax credit with the PPP. I do not know what happens if you give PPP money back without using it. At a guess, as long as you have written proof of having returned it unused, you ought to be eligible for the ERC. There are currently no EIDL funds available unless you perhaps were already in the queue (maybe) or have an ag-related business.
To use the ERC, you start by hanging on to funds you normally pay for your 941 by May 15. If your request for funds is going to be greater than your tax payment, which of course it is, you fill out and fax in a Form 7200.
The first quarter 941 is not eligible, but wages paid March 13-31 are. You just attach them as part of your April 941 payment (or withheld payment, in this case). I have not yet seen a revised 941, but you don't have to wait that long.
However, as a caveat, I faxed in my first Form 7200 (you can file several times) over two weeks ago, and have not yet received a check or any other information from the IRS, so at this point I'm under the assumption that it's going to work every bit as poorly as everything else has so far. The one thing you can do, short-term, is hang onto the money you would otherwise send to the IRS as a 941 payment.
My reading of the instructions, and that's all this is, suggests you can use the entire tax payment and not just the employer's portion of Social Security. That's where you're supposed to start, then move onto the rest of the payment, then request a refund.
And it is $5,000 per employee for the year, not per quarter. Your business has to either have been completely or partially shut down due to covid-19, or your income down 50% for the quarter. Once it drops to that level, it can go back up to 80% of last year's income before you are no longer eligible for the credit.
All of this information can been found starting here: https://www.irs.gov/coronavirus/new-employer-tax-credits.
I need help. I have not been able to get any funds from any source.
I already filed the 941 for Quarter one which includes the period in march. How do I include that as that 941 did not have the credit on it. Or, if it did, I did not see it. Can I amend if it was there? and if it was not present, how do I include part of March?
We are slightly confused in doing research on the IRS site, etc. I understand the maximum credit per employee you can receive is $5,000 in a quarter, but for the entire time frame ending December 31, 2020, is it just $5,000 total per employee or $15,000 (if you count the 3 quarters of the year, $5,000 x 3 = $15000). On the IRS site it just says $5,000 and it doesn't really say clearly if that's for the year maximum, quarter maximum, or both!
Hi, my husband has his own cleaning service for commercial building, and all our business has been closed down due to the building have been shut down. I he had one worker but with us only for a month before this virus hit, but she had other jobs as well she was working part time with before us. My husband only takes a drawal for himself. He was not eligible for the paycheck program. Would he be able to get a tax credit, since all of our building has been closed and we haven't had any money coming in like we have been. We have one building we have been cleaning twice a week, and one that we go and just do comment area's due to the everyone has been close except a couple office, which we don't go in right know because they have asked for not to until this building is back up and running. Is there anything we can file to get help for out company.
Gloria
Hi Gloria - Gene answers this question in sections 1, 2, and 4 of this article. Any company of any size is eligible as long as you can prove two things: A.) that your business was shutdown or suspended by the government because of the COVID-19 pandemic or
B.) that your company suffered a more than 50 percent revenue decline during a quarter compared to the corresponding quarter from the prior year. As long as you have employees and you file a quarterly Federal 941 return, you can take the credit at the time of filing the return. Please reach out to Gene at gene@marksgroup.net for any specific business questions you may have pertaining to this article. Thank you!
You referred to disaster loans being available. Where/how do I apply for a low interest disaster loan?
Hi John - Please reach out to Gene at gene@marksgroup.net for more information on this question. Thank you!
I was not aware of this program before ppp