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In March of 2020, the US federal government passed the stimulus bill called the “Coronavirus Aid, Relief, and Economic Security Act,” also known as the CARES Act. Under the CARES Act, the Employee Retention Credit was created to help affected businesses, like restaurants, keep their employees on the payroll.
Originally, the CARES Act stipulated that businesses that accessed the Paycheck Protection Program (PPP) loans were ineligible for the Employee Retention Tax Credit. And with restaurants among the largest users of PPP loans, this meant many restaurants were initially unable to access both PPP and the tax credit.
However, on December 27, 2020, the Consolidated Appropriations Act was signed into law. The new relief act not only enhanced the Employee Retention Payroll Tax Credit, but it also retroactively eliminated the earlier limitation that prohibited businesses from taking advantage of both PPP and Employee Retention Tax Credits. This means that many small businesses that were previously ineligible for the tax credit, may now be eligible for thousands in Employee Retention Tax Credits per employee.
In light of this recent news, restaurants now have a major lifeline that could help them ride out the remainder of the pandemic. While not every restaurant is eligible, the Employee Retention Tax Credit presents a major opportunity for businesses to significantly lower their federal quarterly payroll tax bill and free up enough funds to stay in business.
To help you better understand this valuable restaurant tax credit, we’ve created a simple guide to the Employee Retention Tax Credit that covers everything you need to know, including:
Before diving into the specifics of the Employee Retention Tax Credit, let’s review what tax credits are.
Each pay period, business owners withhold a certain amount of their employee’s earnings (known as qualified wages) for federal unemployment tax (or FUTA). Payroll tax credits let business owners keep some of this money by reducing the amount of federal taxes and social security owed.
For instance, let’s say your quarterly payroll tax bill is $12,000. If you’re eligible for a $4,000 tax credit, your total tax payment for the quarter would be reduced to $8,000.
Employee Retention Tax Credits
The Employee Retention Tax Credit is a refundable payroll tax credit for qualified wages paid and qualified healthcare expenses provided by an employer who was financially impacted by the COVID-19 pandemic. In 2020, the Employee Retention Tax Credit provided eligible employers with a refundable tax credit of 50% of in wages (up to $10,000). In 2021, this amount was increased to 70% (up to $10,000).
Put simply, if your restaurant has been financially impacted by COVID-19, the Employee Retention Tax Credit is a coronavirus tax credit designed to help reduce your payroll tax bill so you can keep your staff employed during the pandemic.
As mentioned, Employee Retention Tax Credit is intended to help businesses that have been financially impacted by COVID-19. This means that to be eligible for the tax credit, you must satisfy at least one one two categories:
If you’re unsure if your business qualifies for the restaurant tax credit, start by gathering the following information:
Once you have this information on hand, it will be much easier for your accountant to determine your eligibility for the tax credit.
Initially, businesses were ineligible for the Employee Retention Tax Credit if they received PPP loan finds. However, with the passing of the Taxpayer Certainty and Disaster Tax Relief Act, the government is now allowing businesses who received PPP loans to also apply for the Employee Retention Tax Credit, as long as they did not pay specific payroll wages and/or group benefits with PPP loan funds.
The final consideration is your business size because there is a 100 full-time employee threshold that separates large businesses from small businesses. Though the guidelines are the same regardless of your business size, the requirements to quantify are much more restrictive for those with large business status.
Keep in mind that under the 2020 Employee Retention Tax Credit rules, a large employer was defined as more than 100 full-time employees (those who worked at least 30 hours per week or 130 hours in a month in any calendar month in 2019). Under the 2021 rules, a large employer is defined as more than 500 full-time employees. These counts are based on your 2019 full-time employee counts, meaning part-time employees are not included in the calculation to determine large employer status.
It’s important to note that the Employee Retention Tax Credit is retroactive for 2020, and it extends at least through the first two quarters of 2021. Ultimately, qualifying restaurants could receive up to $5,000 per employee for 2020, and up to $14,000 per employee in the first half of 2021.
Of course, the amount your business is eligible for will depend on how your business allocated PPP expenses, and what they filed for when you filed for forgiveness. Most notably, you cannot use your forgiven PPP funds to calculate the Employee Retention Tax Credit.
With all that in mind, let’s review the Employee Retention Credit amounts for 2020 and 2021.
The Employee Retention Tax Credit can be claimed against 50% of qualified wages paid up to $10,000 per employee for wages paid between March 13 and December 31, 2020. A restaurant with 100 or fewer full-time employees may be able to access Employee Retention Tax Credits of up to $5,000 per employee.
In 2021, eligible employers may claim the credit against 70% of qualified wages paid, up to $10,000 per employee, per quarter. For the first two quarters of 2021 – January 1 to March 31, 2021, and April 1 to June 30, 2021 – restaurants with 500 or fewer full-time employees may be able to access Employee Retention Tax Credits of up to $7,000 per employee per quarter.
As enticing as these numbers sound, employers should keep a few things in mind:
As a result, it’s important to think carefully about which restaurant tax credit makes the most financial sense for your business to claim.
In order to claim your 2020 Employee Retention Tax Credits, you must file Form 941-X. Filing this form will allow you to claim refunds for payroll taxes paid on the originally filed Form 941.
In 2021, 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 quarters of 2021. Just remember to speak to your accountant about this approach as it can come with a big learning curve.
To illustrate how this all works, let’s take the example of Bob’s Crab Shack, which has 75 full-time employees. Between March 13, 2020, and December 31, 2020, Bob’s Crab Shack paid out $8,000 in wages to each employee ($600,000 in total payroll).
In this case, Bob’s Crab Shack would be entitled to an Employee Retention Credit of $300,000 ($600,000 with a 50% credit) for 2020. To claim this $300,000 refund, Bob’s Crab Shack would file Forms 941-X.
Now lets assume Bob’s Crab Shack is also eligible for Employee Retention Tax Credits for the first and second quarter of 2021. In 2021, Bob knows that his 75 full-time employees will each be paid $3,000 per quarter. This means that Bob’s Crab Shack would be eligible for a total Employee Retention Tax Credit of $315,000 for the first two quarters of 2021 ($3,000 in wages per quarter x 75 employees with a 70% credit = $157,500 per quarter).
If Bob needed to free up some funds, he could reduce his businesses’ federal tax deposits and immediately begin monetizing the credit for the first quarter of 2021. The estimated residual balance of the $157,500 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.
It’s clear that Employee Retention Tax Credits can be incredibly valuable to restaurants because they can significantly lower your federal quarterly payroll tax bill and make cash flow management easier in the months ahead. This credit is especially valuable now that employers no longer have to choose between PPP loans and the Employee Retention Tax Credit.
And while the purpose of the Employee Retention Payroll Tax Credit is to help restaurants keep staff employed, saving a bit on payroll can also free up funds for other purposes. For instance, the Mockingbird Bar + Garden in Chicago’s suburbs used funds freed up by the Employee Retention Tax Credit to build an outdoor dining space that helped them continue bringing in customers throughout the winter months.
While PPP loans may have received the majority of the publicity, the Employee Retention Tax Credit is an equally valuable form of restaurant funding. At a time when every penny counts, this coronavirus tax credit can help restaurateurs free up enough funds to keep staff employed and make it through the pandemic with their businesses intact.
For more information about the Employee Retention Credit under the CARES Act, please refer to this FAQ page published by the IRS.
Disclaimer: This article provides general information and should not be construed as tax advice. Since tax rules may change over time and can vary by location and industry, please consult an accountant or tax advisor for advice specific to your business.