Professional service firms, like most employers across the globe, are struggling to stay afloat and retain employees to continue servicing clients through the economic fallout of the COVID-19 pandemic. The latest form of U.S. government response is the $2.3 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which includes a variety of business-friendly provisions, ranging from relaxed rules for claiming tax deductions, credits and net operating losses to the availability of billions of dollars in federal-backed loan for those entities that maintain their workforce through the crisis period.

What Is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit of 50 percent of up to $10,000 in qualified wages eligible employers continue to pay workers between March 12, 2020, and before Jan. 1, 2021, despite their businesses suffering adverse consequences of the coronavirus. According to the IRS, the maximum credit for qualified wages paid to an employee is $5,000.

Because the credit is refundable, amounts in excess of an employer's portion of their employees' Social Security taxes will be treated as an overpayment and refunded to the employers or applied to offset any of the employers' remaining tax liabilities.

Am I Eligible for the Employee Retention Credit?

The credit is available to private-sector employers of all sizes, including professional service firms, that meet the following criteria:

• The business's operations are fully or partially suspended by government order due to COVID-19 during any calendar quarter of 2020, and

• The employer's gross receipts during a calendar quarter fall below 50 percent of its gross receipts during the same quarter in 2019.

Employers will not qualify for the credit when gross receipts exceed 80 percent of a comparable quarter in 2019.

It is important to note that self-employed professionals and firms that receive federal-backed small business loans are not eligible for the employee retention tax credit.

What Wages Qualify for the Credit?

Qualifying wages include compensation paid to employees and a portion of the employer's costs for providing its employees with health insurance during the period of March 12, through Dec. 31, 2020. The amount of wages used to compute the credit depends on an eligible employer's number of employees.

For firms with less than 100 employees on average in 2019, the credit is based on the actual retention wages paid to all employees during the period of economic hardship, regardless of whether those employees actually worked.

For firms with more than 100 employees on average in 2019, the credit is allowed only for wages paid to employees who did not work during the calendar quarter due to a full or partial COVID-19-related suspension of business operations. Wages may not exceed the amount employees would have been paid for working during the 30 days immediately preceding the period of economic hardship.

Can I Receive Both the Employee Retention Credit and the Expanded Paid Sick Leave Tax Credit under the Families First Coronavirus Response Act (FFCRA)?

Employers may receive both credits but not for the same wages. The amount of wages a business claims as an Employee Retention Credit may not include any wages they pay firm members for qualified sick and family leave under the FFCRA, which includes federal income tax credits for 1) the first 10 days of an employee's paid sick leave of $511 per day, and 2) the full term of an employee's additional leave, up to 12 weeks, as a rate of $200 per day, and $10,000 in total for each employee.

How do I receive the Employee Retention Credit?

Businesses may be reimbursed for the credit immediately by reducing their required deposits of payroll taxes that have been withheld from employees' wages by the amount of the credit.

Eligible employers will need to report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or IRS Form 941 beginning with the second quarter of 2020. If an employer's employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

It is critical that businesses understand all of the requirements they must meet to assist workers through this crisis, while keeping a watchful eye on the limitations, restrictions and exemptions that may preclude them from qualifying for refundable tax credits.

Andreea Cioara Schinas is an accountant and director in the tax services practice of Berkowitz Pollack Brant Advisors + CPAs in Fort Lauderdale. Contact her at [email protected].