The employee retention credit under the CARES Act encourages companies to keep employees on their payroll. Employers who file an annual payroll tax return can file an amended return using Form 944-X (employer's adjusted annual federal tax return or request for reimbursement) or Form 943-X (adjusted federal employer tax return for agricultural employees or request for reimbursement) to apply for credits. An employer considered large under the CARES Act may be eligible to receive non-service-related wages and a commensurate amount of qualified health plan costs during an eligible quarter. The initial confusion surrounding eligibility for the employee retention credit was further compounded by legislative changes following the CARES Act, which resulted in an eligibility matrix that employers could navigate with little guidance.
The original CARES Act included an exclusion of government employers, which prevented government employers and government agencies from claiming the ERC regardless of whether they complied with the government's orders test or with the gross income test. The CARES Act specifically recognized that tax-exempt organizations can be considered eligible employers, unlike most federal tax credits, which are deducted from income tax liability. While the CARES Act seems to make it clear that no decrease in income is required by establishing that an employer can be considered eligible if it complies with the government's orders test or the gross income test, employers often overlook this fact. Employers reported the total qualifying wages and the employee retention credit related to COVID-19 on Form 941 for the quarter in which the qualifying wages were paid.
These complexities need to be analyzed to determine eligibility and calculate an accurate ERC, says Ashley Hogsette of Synergi Partners. The classification of an employer's staff as small or large only affects the type of salary included in the ERC calculation; size has nothing to do with eligibility. Small employers can include all salaries paid, as well as qualifying health plan expenses during an eligible quarter. The credit was allowed from the employer's share of social security taxes (6.2% rate) and the railroad retirement tax on all salaries and compensation paid to all employees during the quarter.
Clearly, this employer suffered a partial suspension of its business operations and is likely to be eligible for the ERC. There is still time to apply for the ERC retroactively by filing Form 941-X (adjusted federal tax return from the employer or request for reimbursement). The Employee Retention Credit (ERC) is a refundable tax credit against certain payroll taxes that was originally created under the CARES Act to help companies cover the cost of keeping workers employed during the pandemic. For the purposes of the employee retention credit, a portion of an employer's business is considered greater than a nominal share of operations if the gross revenues of that part of business operations are not less than 10% of gross revenues (determined by the same calendar quarter of 2018) or if the hours of service performed by the employee are that part of the company no less than 10% of the total number of hours of service performed by all employees of the employer's company.