On March 27, the House of Representatives passed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. This legislation included many provisions intended to improve cash flow for taxpayers impacted by the COVID-19 pandemic. One such provision is the Employee Retention Credit.
Key Provisions Include:
- Eligible employers may claim a refundable credit against the employer portion of social security payroll tax of up to 50 percent of the first $10,000 of eligible wages per employee in 2020, resulting in a maximum credit of $5,000 per employee.
- Applies to employers whose business was fully or partially suspended in 2020 as a result of governmental orders due to the Coronavirus, or whose gross receipts for the quarter are less than 50 percent of gross receipts from the same quarter in 2019.
- Eligibility for a reduction in gross receipts for businesses that were not fully or partially suspended is not available to businesses with more than 100 full-time (greater than 30 hours per week) employees in 2019.
An eligible employer must have been carrying on business in 2020 and must meet one of two criteria indicating their business was impacted by the virus:
- must have been ordered by a governmental authority to suspend or reduce business operations due to COVID-19, including commerce, travel or group meetings; or
- must have suffered a decline in gross receipts of at least 50 percent in a calendar quarter as compared to the same quarter last year.
- Eligibility under this criterion continues until gross receipts for a quarter are 80 percent or more than the gross receipts from the same calendar quarter in 2019.
Tax exempt employers must have been ordered to shutdown or reduce business, such employers are not eligible solely due to a decline in donations or business income receipts.
Governmental employers are not eligible.
Businesses who receive a covered loan under the Small Business Act paragraph 7(a), Payroll Protection Program loans introduced in the CARES Act, are ineligible for the Employee Retention credit.
Businesses which were deemed to be essential by governmental authorities may still have been affected by limitations on group meetings etc. We are waiting for additional guidance on whether such businesses will qualify as having “reduced business operations” due to governmental orders.
- The credit applies to wages paid after March 12, 2020, and before January 1, 2021 and qualified wages are limited to $10,000 per employee for the year.
- For small employers, with 100 or fewer full-time employees, eligible wages include those paid during the quarter the employer was required to suspend or reduce business, or quarters in which the employer met the reduced gross receipts test.
- For large employers, with more than 100 full-time employees, only wages paid to an employee during the time the employee wasn’t working are eligible and such wages are limited to the wages the employee would have received for the same amount of work in the 30 days prior to when the employee stopped working.
- Eligible wages include qualified health plan expenses paid to a group health plan applicable to the employee wages.
- Eligible wages do not include wages for paid sick leave or paid family leave eligible for the credit under the recently enacted Families First Coronavirus Response Act, wages used in determining credits under the existing Employer Credit for Paid Family or Medical Leave, or wages of employees for which the Work Opportunity Credit was claimed.
- Employers who claim both the mandatory paid leave credit and the employer retention credit will apply the paid leave credit first and then apply the employer retention credit to any remaining wages not taken into account for the paid leave credit.
- Certain employers with related commonly owned businesses may be required to determine eligibility for small employer status by aggregating their employees for the related businesses to determine if they are subject to the rules for large employers.
Claiming the Credit
The credit will offset the 6.2 percent employer portion of the social security (OASDI) payroll tax and is refundable to the extent it exceeds the payroll tax liability of the employer for the quarter.
In the case of wages paid by a certified professional employer organization (CPEO), the Employee Retention credit may be claimed by the customer, not the CPEO.
We are waiting for guidance on how this will be claimed on an employer’s quarterly payroll tax filing.
An eligible employer may also opt out of claiming the credit.
Please contact us with questions regarding how this credit can benefit your business.