On-Demand: Employee Retention Credit | An Alternative to PPP Loans
Tax and business professionals learned who is eligible for Employee Retention Credit and how credits are computed.
Jeffrey Kelson:Good day everybody. Thanks for spending the next hour with us. Hopefully we can cover what I think is sort of an overlooked area of tax, a week away from the new July 15th deadline, is the Employee Retention Credit or the ERC. And the reason it's been a little overlooked is because if you qualify for the Paycheck Protection Program loan, you do not qualify for the Employee Retention Credits. So a lot of businesses that took out a PPP, do not have the opportunity to qualify for the ERC. But as you will see, many businesses either did not qualify for the PPP for a whole host of reasons, who are qualified, but then returned the funds.
So hopefully we can shed some more additional light on what these Employee Retention Credits. It's more than just a consolation prize. But there are some really big differentiating thresholds that you need to be aware of to see how you can optimize the credit and how much the credit will be a boon to the business. So the ERC overview, obviously, it says right in its name, the Employee Retention Credit was there to encourage employers to retain their employees and continue to pay their salaries.
Now, the way the ERC works is you take it against the employer's share of the Social Security tax, so 6.2% of wages paid, and it reduces the payroll taxes after any other reductions due to qualified family or sick leave credits, which was back a few months ago that came out. And also, as you might hear later, it also comes after the FICA tax deferral and I want to differentiate. The FICA tax deferral for almost all businesses to 2021 and 2022 for this share of the employer Social Security tax.
So this ERC comes after these credits and deferrals. But it's also a fully refundable tax. So meaning that if there's not enough with holdings or funds to take your credit against the IRS will give you a payment, a refund, or advance if you file, what you'll see is the form 7200. So it's a fully refundable tax credit for boys and equal to 50% of the qualified wages that the employers pay. The employees and in parentheses are very important because there was some confusion for a while, because it does include eligible qualified health plan expenses, it's not just the payroll that you pay the employees, but also the portion of a qualified health plan expense.
The maximum amount though for the entire year, or from March 12th, 2020 through December 31st, 2020 for all calendar quarters is $10,000. So the maximum credit, a business can claim for any employee is $5,000 to $10,000 max. So, still a nice sum, $5,000. An employer may not claim it, as I mentioned before, if it has received a PPP, or if it had received a PPP if it did not return alone by May 18th, 2020. So, basically any business that does not have a PPP loan after May 18th, 2020 would be the ones that would be eligible for this ERC.
Before I get to that I did want to mention about the health plan, the health expense. That's very valuable when you had businesses that furloughed employees, but continued to pay their health care expenses. So those health care expense payments will qualify as wages for purposes of this credit. And you'll see that that's even more valuable to have over 100 employees. But let's go on to who is an eligible employer.
So eligible employers are employers that carry on a trade or business during the calendar year of 2020. But that's more than that. They must have fully or partially suspended operations during any calendar quarter in 2020. And this would be due to orders from an appropriate governmental authority, that will limit commerce, travel, group meetings due to COVID-19. Or you could qualify under experiencing a significant decline in gross receipts during a calendar quarter versus the calendar quarter, similar to the same calendar quarter in the previous year.
But there are two ways to get there. And the ERC is available to employers of any size, but you will see that the number of employees will determine the amount of eligible wages. So if you have over 100 FTEs, and this is a big distinction, if you have over 100 full time employee equivalents it's not as beneficial to a business for the ERC. If you have under 100 full time equivalents, it's very beneficial. Also, there has been a recent guidance on tax exempt organizations. That tax exempt organizations may claim the Employee Retention Credit. And that I think was last week, they came out with that.
So what is the trade of business? Well, it has the same meeting as used in code section 162. Those, other than the trade of business of performing services as an employee, and of course, it's a profit, must have a principal purpose, a primary purpose of profit making and conducted on a regular, continuous and substantial basis. So what does that really mean? Like if you have household employees, and you continue to pay them, their wages don't qualify because you're not conducting a trade or business. There's no profit motive in your household employees for the most part. So that's an obvious example of not being a trade or business.
But I think a lot of that is under tried and true, tax rules that have been established all throughout the years. Self-employed, individuals can claim the credit for qualified wages paid to employees, but the self-employed earnings are not eligible. And also, there's some other rules regarding paying owner employees. That's not self-employed. And there's some thresholds there where your earnings, your wages, or your family members' wages might not also qualify.
Now, there's aggregation rules. So an eligible employer you have to kind of aggregate all their businesses and companies under Code Section 52 or 414 to determine whether you have a trade or business operation that was solely a partially suspended or whether to determine, you have to combine them and aggregate them to determine whether you had a significant decline in gross receipts.
You also have to aggregate them to determine whether you have more or less than 500 FTS and you'll see the importance later. And also for whether if you had one member that received the PPP, but nine other members that did not receive a PPP, that one member that got the PPP loan disqualifies the other nine. So the aggregation rules are very important if you have multiple companies and multiple related parties in determining how and what you qualify for the Employee Retention Credit.
Also, it may be the aggregation rules might also require taxpayers to be treated as one employer if they can control group or affiliated service groups, whether your parent-sub, brother-sister, so you might have to combine them. Now one interesting positive aspect. So you say, "Oh, this is terrible. That can get me over the 100%. Maybe that disqualifies me because I had a reduction in one business's gross receipts but the other businesses didn't have it. So when you combine them all together, I didn't really have a significant reduction." But one benefit to combining them, for instance, is you could have a partial suspension, let's say a private equity firm has two of its 15 portfolio companies partially shut down. The other 13 are operating as before or similar. Those two shut down or partially suspended will qualify the whole aggregate group to qualify for the ERC since you had to have two of the members partially shut down.
So it could be a benefit. Normally it's not, but in that particular case, it is a benefit, for the shutdown rules.
Getting some questions about whether a pre-revenue entity be eligible this quick, I would think would be if it's a trade or business. You wouldn't probably meet the reduction in gross receipts because of no prior year, but you would have to be qualify under the partial shutdown rules.
Next up, I will turn it over to partner Carey Gertler who will take you through more provisions of Employee Retention Credit.
Carey Gertler:Thank you, Jeff. Good afternoon, everybody. As Jeff said, my name is Carey Gertler. I'm a partner in the private business service group at EisnerAmper. And now I'm going to talk about what conditions must exist give rise to the ERC, Employee Retention Credit. It's either the employer was required fully or partially suspend operations during any calendar quarter of 2020 due to orders from a governmental authority limiting commerce, travel or group meetings due to COVID-19. Or the employer experienced a significant decline gross receipts during the calendar quarter when compared to the same quarter 2019.
So if you fall into one of these two categories, you'd be eligible to take the ERC. Now, it's one thing to note in item A that it has to be due to COVID-19. So if a business closed, let's say due to health violations, that would not be covered. So it's important that its impact due to the COVID-19, or its gross receipts. Also, as Jeff had mentioned, a lot of the guidance that we are presenting and is coming out is continuously being refreshed. And the last guidance on this is frequently asked questions. That was issued less than two weeks ago on June 26th. And there have been several updates there, so it's important to kind of stay up to date on what's going on.
So, what does qualify or fully or partially suspended operations. You have to meet all three conditions. So the first condition is an appropriate governmental authority imposes restrictions on employer's operations, two the order limits, commerce, travel or group meetings, whether it's commercial, social, or religious, due to COVID-19. And the orders affect an employer's operation of its typical operations.
So if a company were to shut down voluntarily for the benefit of employees, it would not satisfy that requirement. It has to be by an order, an appropriate order. And actually on June 26th, the government clarified that with its FAQs of what an appropriate government authority is, and we'll get to that. Now, they also did clarify if you have a business that has essential and non-essential business, that are both more than minimal and the non-essential business isn't suspended by government order the essential business can also be considered as partially being suspended.
So you need to balance and understand what's essential non-essential during this old calculation process. Orders from an appropriate government authority include an order from a city's mayor stating that all non-essential businesses must close for specific specified period, a state's emergency proclamation that residents must shelter in place for a specified period. Other than residents who were employed by the essential business. And these are two new ones. An order from a local official imposing a curfew on residents that impacts the operating hours of a trade business for a specified period. And an order from a local health department mandating workplace closures for cleaning and disinfecting.
Now, also, it's important to be aware that essential businesses versus non-essential will vary by jurisdiction to jurisdiction. So you need to be cognizant of that. Now, a statement that is made by a government official, for example, in a press conference, that would not rise to the level of a governmental order. Additionally, a declaration of a state of emergency by a governmental authority is not sufficient to rise to the level of a governmental order if it does not limit commerce, travel or group meetings in any manner. So that's an important thing is it has to limit travel and meetings. And further such a declaration that limits commerce, travel or group meetings, but does so in a manner that does not affect the employees operations of its trade or business also does not rise to the level of a governmental order.
So you need to have all the components in order to meet the requirement to be an appropriate governance authority, giving you the mandate to close. So here's an example of a government order for a non-essential business. The state governor issues an order and that old non-essential businesses must close from March 29th, 2020 until April 30th, 2020. The order provides a list of non-essential businesses. Employers that to provide essential services must remain open. Now, this satisfied the three tests for the non-essential business that we had previously mentioned. There was an order, that limited commerce and affected the operations. So in this example, the non-essential business would be eligible to take the credit in Q1 and Q2, of 2020.
Now an essential business. Mechanical Inc. is an essential business is not required to close its locations or suspend its operations. Mechanic Inc.'s business has declined significantly. Now, it's not considered to have been fully or partially suspended, because it's an essential business. So it wouldn't qualify for the ERC under that requirement. However, we're saying here that there was a significant decline in gross receipts, and if they meet the threshold, which we'll talk about, they could be eligible for the ERC under the reduction in receipts rule.
Here's a non-essential business example again. ABC Company maintains an office in a location where the mayor has ordered only essential business may operate. ABC Company is deemed non-essential under the mayor's order and must close it. The company ordered mandatory telework for all employees and limited client meetings to telephone or video conferences. Result is that ABC's business operations may be concerned to be fully or partially suspended by government order. It goes to the facts and circumstances of how the business is operating. So in the recent FAQs, the IRS, the Treasury had said that if a business closes, and it orders its employees to telework, and there is no change in how they operate, they're saying that that would not fall under the criteria for a partial or complete suspension of services.
However, if you're closing the office and you're not able to buy the same level of services that were provided, only some of them, then you might be considered partially suspended by the government order. Some examples would be restaurants, right now, or as they start open, they had no dining services whether it was inside or outside, they can only do curbside. So they were able to provide some services but not all of them and they would have been considered partially suspended.
National regional businesses. So this is also important because employers that operate in multiple locations are subject to the state and local governmental orders limiting operations. Some, but not all jurisdictions are considered to have partially suspended operations. So for example, if you take a national chain, like Best Buy, and only some of their stores are impacted, because some states have orders and some don't, and they go to a company policy of doing curbside. You're able to treat each location as parsley suspended even though some of these Best Buy stores are fully operational in states where there's not orders to shut down.
Eligible payroll quarters. So, once an employee has an eligible quarter, the entire quarter is eligible. Qualified wages can only be paid during the periods during the quarters, which the operations were fully or partially suspended. So what that means is that on our previous example, if we closed on March 29th, for the first quarter, wages that were incurred on March 29th, or March 30, March 31, would be eligible, not wages that incurred prior under the under this example.
So that's important. Now that's obviously when we have the situation with a shutdown. When we have a gross receipts situation where our receipts are less than a decrease by 50% or more than the whole quarter of wages would be eligible for the ERC. So depending on what bucket you fall in, will determine when you can start the calculation in that quarter for qualified wages.
Gross receipts. So if you're not falling under the requirement for partially or fully shut down suspension of services, then a company has the option to qualify for the ERC under the gross receipts. And the gross receipts have the same meaning under the IRC code 448. And it's basically all your sales, which would also include interest, dividends, rents, royalties, we don't reduce that by cost of goods sold. So it counts for everything. And it does not have to be related to COVID-19. So most likely it is, but there could have been other facts and circumstances where your revenue might have decreased, not related to COVID-19. That's not a requirement here.
One of the new items that came out in the recent FAQs was tax exempt organizations. So they are eligible for the ERC. Okay, but when it comes to the gross receipts test from a tax exempt organization, you include all the gross receipts from all operations, not from a specific leg or arm of that nonprofit organization. A significant decline in gross receipts. So you calculate it by determining the first quarter of 2020, in which the employer's gross receipts of less than 50% of its gross receipts for the same calendar quarter 2019.
So if your gross receipts in the second quarter of 2020, compared to 2019, went down by more than 50% you'd be eligible for that in Q2. Now, at what point are you not eligible, so you're eligible for the ERC and subsequent quarters until gross receipts are greater than 80% on the same count quarter in 2019 But you would continue to be eligible for the gross receipts until at some point your gross receipts equaled 80% or more of your receipts from the prior calendar quarter from that quarter.
So here's an example of how we would apply this. So in 2019, we have our gross receipts, quarter one, quarter two and quarter three of 210, 230, and 250. So we come to 2020. And in the first quarter of 2020, we only have $100,000 of gross receipts. So as a percentage, we're only at 48%. So that means we're under the 50% threshold, for Q1 we'd be eligible. Now Q1 that would start basically, based upon the whole quarter, you'd be eligible but we'd carry forward it. Right now I think the calculation is that you don't file the credit in the first quarter, which we'll talk about later. You'll calculate the credit in the second quarter.
Now we get to the second quarter of 2020. We're showing $190,000 of gross receipts compared to 230. So we're above the 80% threshold. So we're able to take the Q2 ERC, but we can't take it into Q3 because we are ineligible for it. So we get the ERC credit for the first and second quarter based upon the percentages.
I will now turn this over to my colleague Ben.
Ben Aspir:Hi, everybody. My name is Ben Aspir. I'm a senior tax manager from EisnerAmper. And as my colleagues, Carey and Jeff, have covered, so Carey covered the conditions have you had a significant decline in receipts or met the partial or complete shutdown? So assuming you've met one of those and you're an eligible employer, the question is now Well, "Great, I meet those qualifications, what wages are eligible for the Employee Retention Credit?" And it's also good to know that it's better to have a significant decline in receipts to meet that threshold because the entire wages for that quarter and up to certain limits are eligible, whereas once the partial or complete shutdown is lifted by the government, you stop counting those wages, up until that date. But once the order is lifted, if it's lifted mid quarter, then only for half the quarter, do you count those wages towards the ERC.
If you have a significant decline in receipts, as Carey explained, the entire quarter is eligible, wages, subject to the cap. So what wages are eligible for the ERC? Any wages and compensation paid by an eligible employer, as Jeff mentioned earlier, it includes, we actually had someone asked a question on this, qualified health plan expenses that are properly allocated to wages. It cannot exceed the amount the employee would have been paid for the same duration during the 30 day preceding period. That rule is to prevent employers from playing around with the wages to accelerate the credit. They want the true wages that were paid and, they don't want any manipulation of the wages.
This just came out Monday, the new FAQ on the IRS website, wages that are exempt from social security taxes are ineligible for the Employee Retention Credit. What type of wages would that be? Well, if you're participating as Dependent Care FSA plan, we have pre-tax wages taken out for daycare or camp, for day camp. So those wages generally are not taxed by FICA. So since they're not taxed by FICA, those wages wouldn't be eligible for the ERC. If you have a health plan, FSA and flexible spending account plan, the same thing. Whereas if you're contributing to a 401k, or 403B type plan, even though it's pre-tax, its pre-tax for income tax purposes, you're still paying payroll taxes on those wages. So those wages attributable to that type of plan would be eligible for the Employee Retention Credit. As was mentioned earlier, the wages are capped at $10,000 per employee for the entire 2020. And the credit is capped at 50% of that which would be $5,000.
So the number of full time employees that a company has will determine the amount of the credit that's calculated. If the company has 100 or less, they will get significantly better credit than if they have more than 100 full time employees. And I'll walk through how what is a full time employee. A full time employee is any employee in the 2019 calendar month that had an average of at least 30 hours of service per week or 130 hours of service in a month. And this is based on the rules under the Affordable Care Act. So they when they drafted the law for this for the ERC, they copied and pasted the rules to be very similar to the Affordable Care Act as far as the definition of a full time equivalent employee.
An employer that operated its business for the entire 2019 calendar year, calculates its full time employees, take the entire sum and divide it by 12 and asked their average full time employees for calculating employer retention credits. So why is there a big disadvantage if you have more than 100 full time employees? So if you have more than 100 full time employees, only the wages or health and expenses that are paid to an employee, not to work, that's the big key. And we'll walk through an example of what that means. But if qualified wages for an employer do not exceed what, like I mentioned earlier, during the 30 days prior, they may not treat qualified wage amounts paid to employees for pay time off, for holidays sick days, none of those would count towards the Employee Retention Credit. However, as you'll see in the next slide, if the company has 100 or less full time employees, everyone gets it, whether they're working or not. The Employee Retention Credit is eligible for all those employees. And we'll walk through an example as well.
So if you have more than 100 employees, only wages include paid not to work, less than or equal to 100 full time employees includes wages paid to all employees regardless of whether we're working or not.
Move on to the next slide. We're going to walk through a calculation of how you calculate qualified wages. So ABC company has eligible quarters in Q2, Q3 and Q4, either they had a significant decline in receipts, or a partial shutdown, they had fewer than 100 full time employees, which, as I mentioned early is very important. During those quarters, ABC company pays salary to employees in the following amounts.
So in Q2, ABC paid employee A $8,000. So those wages are eligible. Remember, it's up to $10,000. Employee B got $12,000 wages. The first $10,000 are eligible for the credit and the remaining $2,000 are not computed for the credit. And we will no longer account, as you'll see as I walk through the example, that these ways will no longer count other than the first $10,000 in the second quarter. C's wages are $4,000, so that'll count for the ERC, and D's wages in Q2 are $2,000.
Moving on to the third quarter, A gets paid $7,000 of wages, so $2,000 of that would be eligible for the ERC because we've already claimed the first $8,000 capping attend. So after the first $2,000, the remaining $5,000, any subsequent quarters would not be eligible for ERC. Like I mentioned B. B's wages are disregarded. C's wages are still included because only $4,000 was computed in Q2. So that all C's Q3 wages of $4,000 are calculated for the ERC and the same for D in Q3. Of the $2,000.
So moving on to the fourth quarter now that A's wages capped out in the third quarter, A's wages are no longer counted, the same for B, and C. For C the first $2,000 wages will count, since only $8,000 was taken in Q2 and Q3, and the remaining $2,000 wouldn't be calculated ERC and for D, all of these wages in Q4, $2,000 would be eligible since D's wages never hit the $10,000 cap.
So to summarize, in the second quarter ABC company has $24,000 of qualified wages. So you have $8,000, the $10,000 cap for B, $4,000 for C and $2,000 for D in Q2. In the third quarter ABC company has $8,000 of qualified wages, which is the first $2,000 of A's, $4,000 for C and $2,000 for D. And in the fourth quarter, the only employee's wages that are eligible are D's and part of C's for $2,000.
Now let's do an example of a company with more than 100 full time employees. The state forced a restaurant to discontinue sit down service for patrons in Q2 and Q3. It continues to pay its kitchen staff to prepare takeout food every day. The restaurant's very nice and still pays its wait staff to stay at home and not work because they there's no sit down service. So the result is a deemed partial suspension of business because they’re not allowed to have sit down service, but only the wages paid to the wait staff because they were not working. That's the critical point here, since there was more than 100 full time employees, they only get the credit for wages paid to employees not working. The wages paid to the kitchen staff are not eligible for the Employee Retention Credit.
If they had been less than 100 full time employees everybody's wages would have been eligible, the kitchen staff and the wait staff, they were 100 or less would have been eligible for the Employee Retention Credit. The other limits on the qualified wages, the amount of wages for which an eligible employee may claim ERC does not include any amounts on if qualified, sick and family wages were claimed, for which the employer receives tax credits. The purpose of this rule is the IRS doesn't want double dipping on claiming credits for the family leave, and for the ERC.
Here's another important point. The PRC is not allowed for wages paid to a child, a sibling, a step-sibling, a parent, step-parent, a niece, nephew and uncle, or in-law or of anyone who owns more than 50% of stock of a corporation, or 50% of the capital or profit interest in a partnership. Qualified wages are reduced by any wages for which a work opportunity credit is claimed, the same reason the government didn't want employers double dipping on the credit. They're already getting an income tax credit for the work opportunity credit. Not going to let them take a payroll tax credit as well on it. Payments including severance payments made to a former employers also not eligible wages, which makes sense. The purpose of the credits to retain employees and not to fund layoffs, severance payments.
Qualified Health Plan expenses. So we spoke about wages and now we're going to talk about health fund expenses. Health fund expenses that are properly allocable to employee's qualified wages to provide and maintain a group health plan. Only to the extent that these amounts are excluded from employees gross income. That generally puts both the portion of the costs paid by the eligible employer and the portion of costs paid by the employee with pre-tax contributions. After tax contributions are not included.
So for more than 100 full time employees in 2019. If they pay wages to employees not to work, they may treat the portion of the health expenses allocated at the time that the employees are being paid, but now providing services to qualified wages. The IRS had received questions, what happens if a company is not paying its employees but it is covering their health insurance. They couldn't afford to pay their full salary. But they want me to help their employees out. They said, "You know what we're going to cover your health insurance." So if you're more than 100 full time employees the health expenses for employees not to work, those would be eligible and less than 100, the health expenses for all employees would be eligible.
Just to walk you through an example. The employer has more than 100 full time employees in 2019. They're subject to a partial suspension all employee's hours and salary are reduced by 50%. But continues to provide full health coverage. Note that it's more than 100 full time employees. So only the amount paid for employees not to work. So since they're at a 50% work schedule but they're covering the full health expense 50% of that health expense would be eligible. So great, you qualify for the credit, but how do you claim the credit?
So there's a bunch of different options. So, you have these withholdings from your employees to actually not remit them to the IRS. You calculate your credit, and we'll walk through an example. So, you actually do not make your weekly, bi-weekly or monthly deposits to the IRS, you hold on to them so you have an immediate cash infusion. But what happens if your credit's higher than what your deposits are anticipated to be and we'll walk through an example on the next slide. You can file the form 7200 which is an immediate refund claim.
So what happens if you withhold the employee deposits and you got to refund claim on the 7200. You would chew everything up on the quarterly payroll tax form, the form 941, which is actually the quarter just ended about a week ago and it's actually due at the end of the month. So it's important that people know what their ERC wages if they're eligible. And as Jeff mentioned earlier, if a company is participating in the payroll tax program, that comes first before any ERC, payroll tax, a credit can be taken on it.
And just to walk you through an example, on claiming the credit, ABC LLC is eligible in Q2 of 2020, and has fewer than 100 full time employees in 2019. During the first pay period of the second quarter, it paid 20 employees a total of $100,000 of qualified wages. As part of normal payroll tax deposits for the pay period, ABC LLC had the following obligations. Remember, the key here is that they have less than 100 full time employees. Their federal income tax withholding deposits would have been $25,000, their share of Social Security tax would have been $66,250. Medicare tax would have been $1,450. And the employee share of Social Security tax would have been $6,200. And the employee share of Medicare tax would have been $1,450.
So the total deposits that should have been remitted to the IRS would have been $40,300. But ABC calculates its credit to be $50,000. So great, I get to hold on to the $40,300. But they're still getting an additional credit of $9,700 that they don't have immediate cash on hand, so how do they get the remaining $9,700 they can either wait to file the 941, their quarterly payroll tax report and then get a refund or if they want to cash immediately, well not immediately, they file a form and hopefully get the refund quickly from the IRS.
They can file this form 7200 as you'll see here. So as you see ABC LLC, if you look at Part One, row C we report $100,000 of wages, number of employees on question D, 20. Total Employee Retention Credit 50% of those wages was $50,000. Like I mentioned earlier, question five, how much deposits should have been remitted, that they're going to withhold, $40,300. So you get the row eight, which shows the refund of $9,700. I'm going to turn over the webinar now to my colleague, Carolyn Dolci, a tax partner with EisnerAmper.
Carolyn Dolci:Great, thank you. So what I'm going to do now is I'm going to walk us through a flowchart that we put together. And this is basically a summary of everything that we've been talking about. A couple things to keep in mind. This is as of a certain date, and you know how this stuff works. We go to sleep and there's new rules that come out the next day. So you have to pay attention for potential changes. There is a legend on the side that says whether we're starting, ending this process where there's a decision to be made, or it's a process or a step that you have to make.
And there's also a little things in here to say, IRS FAQs, and that links to the IRS frequently asked questions. So I'm going to walk through this starting with the Start Here arrow. And first thing that you need to do here is you need to figure out if you're part of an aggregated group. And if the answer is yes, then all decisions need to be made on that aggregated basis. Either way, whether you are you're not, you're going to lead to this next question or next decision that you have to make is did you have a PPP loan that was still outstanding on May 18th of 2020. If you did then you're not eligible to take the Employee Retention Credit, but if you didn't, then you can move on to the next box.
Next box is saying are you eligible employer? Are you a trade or business? Kind of talked about this earlier saying that household employers don't count, but not-for-profits do. So we get past that, get the next two tests, and you can take one or the other, you may qualify for both. And we're going to kind of look up first and do test number one that's in the green boxes here. And if you are under an order from the appropriate government authority to limit commerce, treaties, travels, group meetings, and this affected you, your operations, then you would move on. If that's a yes then you're going to move on to the next part of this decision here, which is that you had to fully or partially suspend operations during any 2020 quarter due to this government order that came through.
So I'm going to stop here and we're going to go jump back and we're going to look at the under employment call it orange or pumpkin colored boxes for test two. And this is if you've experienced a significant gross receipts declined during 2020 as compared to that same calendar quarter in 2019. And remember that the CARES Act doesn't require that the significant decline be due to COVID-19. If you get past that one, then you're going to determine what period quarters you actually had this decline. Remember, we talked about the 50% gross receipts test, which allows you to take the credit and then if it goes over the 80%, then you're going to no longer be eligible for the credit.
So we see our two things from green and the pumpkin kind of line up and the next question says, "Do you have an average of 100 or fewer full time equivalent employees in 2019?" Well, you go up If the answer is yes, then all the qualified wages that you pay to any eligible employee during that period would be eligible for this credit. It's capped at $5,000 per employee, remember $10,000 at 50% gets you there. Health insurance or health expenses are included in this. And if you actually have more than 100, full time equivalent employees, then the rules are a little bit different in that you can only take into account the wages that you pay to people that were not providing services to you, and their health care. And the same thing is capped at $5,000 or $10,000, at 50%.
This leads us over to the last box here, which to claim the credit. You could do it on the 941 for any eligible quarter. Or you can you the form 7200 that Ben had just talked about. So this just kind of walks you through everything that we just talked about, and the little click throughs that you could see, to check with the IRS frequently asked questions. So I'm going to go on to the next slide. And hopefully, you'll get these copies and you can look at them in more detail.
Okay, so we're at the end of this. I want to talk about just a couple of things here. One of them is that there are some resources, skipping over the first one for a second, which are the frequently asked questions on the IRS website, and we also have a team, an Employee Retention Credit team at EisnerAmper, where you could email questions to. So, one item that I passed over because there's not a link in there is that there have been discussions and questions that have come up of what happens if you have a company that is in the process of going through a merger. What you do with one company that's had an Employee Retention Credit and the other one has an outstanding PPP loan.
So there is not any specific guidance on this yet. So, the choices and discussions that have been happening would be to potentially delay the transaction. Wait for additional IRS guidance or consider buying the asset. I think that with everything that's going on with the CARES Act, enough people ask the question and sooner or later they get around to giving some additional guidance. So, I think we have a few minutes we can take some more questions. Go to our list here.
Jeffrey Kelson:There's a question if the ERC exceeds the employer share of social security taxes, can the excess be applied against the remainder the tax payable? The answer is yes. Like federal income tax withheld for the employees. Obviously not the state tax. That's the states for the most part are their own beings with this and probably most won't adopt it. But yes, you can go after the other taxes. And if that's not sufficient, then there's that from form 7200 you can get a refundable credit.
Carolyn Dolci:There's also question here and I think this was either in Ben or Carey in your section. Maybe if you want to answer it, what happens if the company didn't exist in 2019 to compare the gross receipts?
Ben Aspir:This is Ben. So the FAQ has actually addressed the situation and they have the company basically calculate what employees they had in 2020. And then they stratified over 12 months and then as if you were open for the full 2020 and you use the employees that you had for 2020. The FAQ has also addressed what happens if the company wasn't started at the last quarter of '19, same situation. So the FAQs do address this.
Jeffrey Kelson:And someone asked would I be considered an aggregated company even though the 941s are filed separately for each entity? To be aggregated under that test, it doesn't matter how you file the 941s, you will be combined for purposes of 100 employees and all that stuff. What if the withholding tax is ultimately remitted to the IRS? There are three ways to get this ERC in advance on the 7200, on time, as a credit against your 941 taxes, and even in arrears in an amended 941. So multiple access to the Employee Retention Credits. They're not trying to hide it, if you qualify.
Ben Aspir:There's one thing to note, if you're using the form 7200 to calculate an advance refund from the IRS, and your calculation is inaccurate when you go to prepare your 941 on a quarterly basis, those penalties that the IRS will assess are not forgivable. So want to make sure that you're doing that calculation prior to filing the 941, that you're accurate.
Carolyn Dolci:There's a question here about can you still receive the Employee Retention Credit if you're an affiliate in another company that did receive a PPP? So I think that gets into the aggregation rules. And-
Jeffrey Kelson:You would not. Yeah.
Carolyn Dolci:Probably you wouldn't like you'd want to go through the different tests to be sure.
Jeffrey Kelson:Somebody said, "I'll be filing the 7200 since the time has passed for 941." Yep, you can do that. But like Carrie said, you want to kind of get it right. You don't want to apply for too much of a refund and then had the interest charge on to employers with greater than 100 FTEs, if employees were paid for not working, but it was a variable schedule are those variable wages still eligible? Yes. So anyone you're paying.
The classic example is you have a receptionist. Now you have nobody in the office anymore, but the receptionist might be doing some work otherwise, from their home, maybe they're working 30% of the time and 70% of the time that they can't fill this schedule, but they're still being paid their salary, that 70% would qualify in that case. So you kind of have to go on and document it in that situation maybe on an hourly basis. But that's if you're over 100, remember if you're under 100 it's all good, life is grand, if you're under 100 FTEs.
Carolyn Dolci:Okay. Thank you all for joining us.
Transcribed by Rev.com
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