What Employers Need to Know About the Employee Retention Credit Under CARES
What is the Employee Retention Credit?
As part of the CARES Act establishes a program to assist small employers with employee retention during the COVID-19 public health emergency. The Employee Retention Tax Credit is a tax credit available to eligible employers for wages paid after March 12th and before January 1, 2021, regardless of the employer’s size. This tax credit allows employers whose businesses have been financially impacted (defined below) by COVID-19, to receive a tax credit equal to 50% of qualified wages (which includes employer side health plan expenses). The maximum amount of qualified wages with respect to each employee for all calendar quarters is $10,000 and the corresponding maximum tax credit for qualified wages paid to an employee is $5,000.
Who is an Eligible Employer?
The Employee Retention Tax credit is available to employers, including tax exempt organizations, that carry on a trade or business during calendar year 2020, that either:
- Fully or partially suspended operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings for commercial, social, religious or other purposes, due to COVID-19;
- Experience a significant decline in gross receipts during the calendar quarter. A significant decline in gross receipts occurs in the first quarter in which a business’s gross receipts are less than 50% of its gross receipts for the same quarter in 2019.
These tests are evaluated on a quarter-by-quarter basis. Meaning, if gross receipts in Q1 2020 were 50% lower than gross receipts in Q1 2019, a business qualifies for the tax credit for Q1. However, as soon as a business achieves quarterly gross receipts above 80% of the same quarter in 2019, it will no longer qualify for the tax credit as of the first day of the following quarter. This second test requires that employers consistently monitor intra-quarter receipts (likely already being done) to ensure continued qualification or anticipated disqualification.
Also, the Eligible Employer tests apply to all businesses, regardless of size, with two exceptions: (i) state and local governments; and (ii) small businesses who have a small business loan (see below).
How is the Retention Tax Credit Calculated?
The amount of the Employee Retention Tax credit is 50% of qualified wages paid up to $10,000 per employee, for all of 2020. What constitutes “qualified wages” depends, in part, upon whether a business had, on average, more or less than 100 employees in 2019.
- If a business had 100 or fewer employees on average in 2019, then the Employee Retention Tax credit is based on all wages paid to employees during any period of economic hardship (as defined above) whether they actually worked or not. In other words, even if the employees worked full time and got paid for full time work, the employer still gets the tax credit.
- If a business had more than 100 employees on average in 2019, then the tax credit is calculated based only on qualified wages paid to employees who did not work during the calendar quarter. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
Importantly, the definition of qualified “wages” for all employers calculating this tax credit includes the employer paid portion of company-provided health care.
How Does an Employer Receive the Tax Credit?
Eligible Employers will report their total qualified wages and related credits on their quarterly federal employment tax returns. If the amount of the credit is more than certain federal employment taxes, the employer will receive a refund of the excess after the return is filed.
Alternatively, businesses can immediately receive the benefit of the tax credit by reducing the amounts placed on deposit with the IRS for quarterly federal employment taxes in an amount adjusted by the tax credit for qualified wages paid during the same quarter in advance of the deposit deadline. The total qualified wages and related health insurance costs for each quarter are then reported on the quarterly employment tax return starting in Q2 2020. Thus, before the deadline to deposit quarterly federal employment taxes with the IRS, a business may reduce the amount of federal employment taxes it deposits for that quarter by half the amount of the qualified wages paid in the same quarter. The reduction in deposits will be reflected on the Form 941, Employer’s Quarterly Federal Tax Return, for that quarter. If the amount of the credit is more than certain federal employment taxes owed, the business may get a refund if there are no other outstanding tax liabilities.
If the anticipated Employee Retention Credit for the qualified wages exceeds the Eligible Employer’s required federal employment tax deposits for that quarter, the Eligible Employer can apply for an advance refund of the remaining balance of the anticipated Employee Retention Credit for which it did not owe federal employment tax deposits. See IRS Form 7200, “Advance Payment of Employer Credits Due to COVID-19,” and instructions thereto.
Interplay of the Employee Retention Credit with Other CARES Act Provisions and the FFCRA
As mentioned above, an Eligible Employer cannot receive the Employee Retention Credit if the Eligible Employer receives a Small Business Interruption Loan pursuant to the CARES Act Payroll Protection Program (PPP loan). This may be because of the forgiveness provisions under the PPP loan with respect to amounts used for payroll. Permitting an employment tax credit on wages paid from funds obtained through a government backed loan that does not have to be repaid would result in a windfall to employers.
An Eligible Employer can receive tax credits for the qualified leave wages under the FFCRA as well as the Employee Retention Credit under the CARES Act, but cannot do so with regard to the same wages. The amount of qualified wages for which an Eligible Employer may claim the Employee Retention Credit excludes the amount of wages for which the employer received tax credits for paid sick and family leave under the FFCRA.
For more information related to the Employee Retention Credit, please see the IRS/Treasury guidance here, FAQs: Employee Retention Credit under the CARES Act. For more employer resources related to COVID-19 employment issues, please refer to our COVID-19 Resource Center, which is updated regularly as new information comes out, https://www.cdflaborlaw.com/coronavirus.