Businesses searching for immediate cash should not overlook the fully refundable employee retention tax credit (ERTC), which permits employers to reduce their deposits of federal employment taxes and even request advances from the IRS. Enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act to incentivize employers to maintain their payrolls, the ERTC allows eligible employers to claim a credit equal to 50% of qualified wages paid between March 13, 2020 and December 31, 2020, up to a maximum credit of $5,000 per employee. For a complete discussion of the ERTC eligibility requirements, see our alert President Signs $2 Trillion CARES Act With Significant Tax and Workforce Relief for Businesses and Individuals.
The ERTC is a fully refundable credit against the employer’s share of Social Security taxes. Funding of any refundable portion of the ERTC is available through employment tax offsets, including both the employer and employee portions of FICA taxes and employee income tax withholding, and employers can request advance payment. To illustrate, if an eligible employer anticipates being entitled to $25,000 of ERTC and otherwise would be required to deposit $15,000 in federal employment taxes, the employer may instead retain the $15,000 and file Form 7200 to obtain an advance refund of the remaining $10,000.
Because the IRS has directed employers that paid qualifying wages in March to claim the related ERTC on their second-quarter Forms 941, eligible employers need not contend with the administrative difficulties of amending first-quarter returns. Further, although the ERTC is not available to employers that receive loans under the Small Business Administration’s Paycheck Protection Program, employers that claim the ERTC nonetheless may be eligible for Social Security tax deferral on wages which do not qualify for the credit. The combination of payroll tax deferral and the use of payroll taxes to fund the ERTC can enable employers that retain their employees to retain much-needed cash as well.
