The employee retention credit is a fully refundable tax credit that eligible employers request to cover certain payroll taxes. It's not a loan and doesn't have to be repaid. For most taxpayers, the refundable credit exceeds the payroll taxes paid in a credit-generating period. Although it can be confusing, the fact that the hours of part-time employees can be added up to form an equivalent of full-time employees will likely allow companies to have fewer employees for the ERC than they reported for the PPP.
For more information on how to apply for the refundable employee retention credit, see How to apply for the employee retention credit. For more information and examples, see Determining the maximum amount of an eligible employer's employee retention credit. Payroll companies are adapting to these standards and have adjusted their systems accordingly to properly record qualified wages per employee. The fact that the ERC is a payroll credit should allow companies to receive the credit and, therefore, the reimbursement, more quickly, since payroll forms are submitted quarterly.
The employee retention credit is a fully refundable tax credit for employers that is equivalent to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay to their employees. The credit is fully refundable because the eligible employer can receive a refund if the amount of the credit exceeds certain federal employment taxes owed by the eligible employer. Therefore, regardless of whether an employee worked 5 or 40 hours, it would be counted as 1 employee in the PPP. The IRS has noted that an eligible employer who pays qualifying wages in a calendar quarter will not be subject to any penalty under section 6656 of the IRC for not filing federal payroll taxes.
Small and emerging businesses in all sectors can have the opportunity to receive financial assistance through payroll tax credits, which can work. For more information, see Determining which employers are eligible to apply for the employee retention credit. Alternatively, Company A could stop remitting to employees and the employer the share of Social Security and Medicare, as well as the federal withholding of employees in each pay period. The federal employment deposit includes the employee AND employer's share of Social Security and Medicare, as well as federal employee withholding.
The credit is allowed against employer participation in social security taxes under section 3111 (a) of the Internal Revenue Code (the “Code”) and the portion of taxes imposed on railroad employers under section 3221 (a) of the Railroad Retirement Tax Act (RRTA) that corresponds to social security taxes under section 3111 (a) of the Code. The rules governing the number of employees for PPP loans are governed by the Small Business Administration (“SBA)” guidelines.
