Companies can no longer pay their salaries to qualify for the employee retention tax credit, but they have until 2024 and, in some cases, 2025, to review their payrolls during the pandemic and apply for the credit retroactively by filing an amended tax return. This means that businesses can analyze their payrolls and apply for the credit even if they have already filed their taxes. The CARES Act does not require employers to pay qualified wages in order to be eligible for the employee retention credit. In addition, eligible employers can choose not to apply for the credit.
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 amount of qualified wages for which an eligible employer can apply for the employee retention credit does not include the amount of qualified wages for family leave and sick leave for which the employer receives tax credits under the FFCRA. An eligible employer cannot receive the employee retention credit if it receives a PPP loan authorized under the CARES Act. An eligible employer receiving a PPP loan should not apply for employee retention credits.
The American Rescue Plan Act (ARPA) allows small employers who received a loan from the Check Protection Program (PPP) to also apply for the Employee Retention Tax Credit (ERTC). To apply for the refundable employee retention credit, employers must file Form 7200, Prepayment of Credits for Employers Due to COVID-19. This form must include the name and EIN of the third payer they use to file their payroll tax returns (such as Form 94, if the third party payer uses their own EIN on payroll tax returns). If withheld payroll tax deposits were not sufficient to cover the expected credit amount, employers can file Form 7200 to request prepayment of the remaining amount of credit. Eligible employers will declare their total qualified wages for the purpose of the employee retention credit for each calendar quarter on their federal employment tax returns, usually Form 941, the employer's quarterly federal tax return.
Employers will report their total qualifying wages and related health insurance costs for each quarter on their payroll tax returns (generally, Form 941, Employer's Quarterly Federal Tax Return) for the applicable period. If an eligible employer completely reduces required federal payroll tax deposits that would otherwise be due to wages paid in a calendar quarter in anticipation of receiving credits, and has not paid qualifying wages that exceed this amount, they should not file Form 7200. Employer F can file a Form 7200 to request a credit or refund of this amount before the end of the quarter (but not for any amount of employee retention credit that has already been used to reduce deposit obligation). Each eligible employer will declare their employee retention credit on their payroll tax return (or on the payroll tax return of their third payer) regardless of their accrual with other entities such as a single employer in order to determine eligibility for the credit.