Restaurants are starting to rebound from the effects of COVID-19 and recent legislation introduced by Congress allows restaurants to use the Employee Retention Tax Credit. This credit can generate cashflow of up to $19,000 per employee for 2020 and the first half of 2021, providing needed liquidity and help for the struggling industry.
What is the Employee Retention Credit?
Under the CARES Act, and subsequently extended as part of the Consolidated Appropriations Act (CAA), the Employee Retention Credit (ERC) provides assistance through June 30, 2021 to eligible employers who retained employees during the coronavirus pandemic. The ERC is a refundable payroll tax credit for wages paid (including tips) and health plan coverage provided by an employer whose operations were either fully or partially suspended due to a COVID-19 related governmental order or that experienced a significant reduction in gross receipts.
The CAA has enhanced some of the provisions under the CARES Act, including retroactive expansion of the ERC to include businesses that received a loan under the Paycheck Protection Program (PPP). This provision states that employers who received PPP loans may still qualify for the ERC with respect to wages that are not paid with forgiven PPP proceeds.
For employers who qualify, the credit can be claimed against 50% of qualified wages paid, up to $10,000 per employee for wages paid between March 12, 2020 and December 31, 2020. For 2020, a restaurant with 100 or fewer full-time employees (FTEs) may be able to access a cash refund of the ERC for up to $5,000 per employee.
Employers who qualify in 2021 may claim the credit against 70% of qualified wages paid, up to $10,000 per employee, per quarter. For example, in the first and second quarter of 2021, a restaurant with 500 or fewer FTEs may be able to claim the ERC for up to $7,000 per employee per quarter (a total of $14,000 per employee).
What Employers Qualify for the Employee Retention Credit?
Most restauranteurs can qualify as an “Eligible Employer” for the ERC if they meet one of two qualification factors in an applicable calendar quarter:
- A trade or business was fully or partially suspended, or had to reduce business hours, due to a COVID-19 government order. For most restauranteurs, these government orders have been extensive, including limiting indoor/outdoor occupancy and forcing business closure as a non-essential business. The credit calculation for this period only applies for the portion of the quarter in which the business is suspended, and not the entire quarter.
- An employer that has a significant decline in gross receipts. Under the CARES Act, if gross receipts of any 2020 calendar quarter are below 50% of the gross receipts when compared to the same calendar quarter of 2019, an employer would be an Eligible Employer for the entire calendar quarter and ending with the next calendar quarter in which gross receipts exceed 80% of the same calendar quarter for 2019. Beginning in 2021, the employer must have a decline in gross receipts by more than 20% in the quarter, when compared with the same quarter of 2019.
The ERC is available for employers who use Professional Employer Organization or utilize a common paymaster agreement to pay their employees through one centralized entity. the calculation of FTE used for PPP loans is not calculated the same way as the FTE for the ERC.
How are the Employee Retention Credits Claimed?
Currently, Form 941-X must be filed to claim 2020 employee retention credits. This filing will allow for employers to claim refunds for payroll taxes paid on the originally filed Form 941. For the first and second quarter 2021, in lieu of a refund claim on the Form 941, employers have the option to reduce their employment tax deposits first and then use Form 7200, Advance Payment of Employer Credits Due to COVID-19, to claim an advanced refund of the estimated remaining credits for the first and second quarter.
Examples of Cashflow from Employee Retention Credits
For example, ABC Restaurant is an eligible employer for 2020 with 75 FTEs that has exhausted its PPP funds and qualified for full PPP loan forgiveness and will be allowed to qualify up to $10,000 of 2020 wages per employee as a qualified wage for the ERC. Between March 13, 2020 and December 31, 2020 ABC Restaurant paid $8,000 of wages to each FTE which were not paid with forgiven PPP funds. Under this scenario, the ABC Restaurant would be entitled to an employee retention credit of $300,000 ($8,000 of wages X 75 employees X 50% credit) for 2020. ABC Restaurant would file Form(s) 941-X to claim the $300,000 refund. ABC Restaurant may still qualify for the ERC in 2021, assuming they are an eligible employer with eligible wages.
As an example for a larger business, XYZ Restaurant has multiple locations, is an eligible employer for the first and second quarter of 2021 with 350 FTEs and exhausted its Round 2 of PPP funding with full loan forgiveness. Assuming the 350 FTEs are each paid $5,000 per quarter during 2021 which were not paid with forgiven PPP funds, XYZ Restaurant would be eligible for a total employee retention credit of $2,450,000; or $1,225,000 ($5,000 of wages X 350 employees X 70% credit) per quarter for both Q1 and Q2 2021. XYZ Restaurant could first reduce their federal tax deposits to immediately begin monetizing the credit for the first quarter of 2021. The estimated residual balance of the $1,225,000 credit for the first quarter could then be claimed by filing Form 7200. The final calculation and total refund claim would be completed with the filing of the first quarter Form 941 in April 2021.
Benefits of the Employee Retention Credit
There is tremendous opportunity for restaurants to claim the Employee Retention Credit as the industry has been heavily impacted by COVID-19 and limited by government restrictions. The best-case scenario for employers for 2020 is a $5,000 credit per employee, as well as, for 2021, a $14,000 credit per employee (credit is currently limited to the first two quarters of 2021). There is also opportunity to maximize both the ERC and PPP loan forgiveness by the using 40% of nonpayroll costs for PPP forgiveness purposes, thereby freeing up additional wages to claim the ERC.
The benefit of the employee retention credit is valuable to restauranteurs and is a much needed cashflow boost. The analysis required to determine eligible employer status and qualified wages for the tax credit is essential prior to attempting to claim the ERC and Bennett Thrasher can provide a free feasibility analysis for your business to determine eligibility.