The Employee Retention Credit established by the CARES Act provides a tax break for employers that do not reduce their workforce. The goal of this program is to incentivize employers to maintain their employees to avoid the continued increase in unemployment.
Tax Credit Calculation
Eligible Employers may receive a payroll tax credit for 50% of qualified wages paid after March 12, 2020, and before January 1, 2021. However, there is a cap on the salary/wages per person applied to the credit. The maximum amount of qualified wages for each employee is $10,000 per quarter. Therefore, so that the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000. Guidance by the IRS further analyzes these credits.
An Eligible Employer under this program is an employer operating during the 2020 calendar year that either:
- fully or partially suspends operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority (e.g. shelter-in-place orders) in response to COVID-19; or
- experiences a significant decline in gross receipts during the calendar quarter.
A significant decline consists of gross receipts less than 50% of the comparable quarter in 2019. Gross receipts reaching 80% or more than a comparable quarter in 2019, the employer is no longer eligible for the credit after the end of the quarter. The US Treasury offers additional guidance on availability of the credit.
Several other programs exist for COVID-19 relief including (1) tax credits under the Families First Coronavirus Response Act (FFCRA) and (2) small business loans under the Paycheck Protection Program (PPP). These programs may limit the ability of an otherwise Eligible Employer to enjoy the Employee Retention Credit.
The FFCRA provides a 100% refundable tax credit for employers with fewer than 500 employees to provide two weeks of paid sick leave and up to 12 weeks of paid family and medical leave for employees affected by COVID-19 through December 31, 2020. An Eligible Employer may take advantage of both of these tax credits, but not for the same wages. Qualified wages under this program does not include the amount of qualified sick and family leave wages identified under the FFCRA.
Additionally, an employer may not receive a tax credit under this program if they take a small business loan under the PPP. Taking one of these small business loans disqualifies an employer from this tax credit program.
Claiming Your Tax Credit
Eligible Employers may claim this credit by reporting total qualified wages and applicable credits on federal employment tax returns. The employer can immediately benefit by reducing the amount of payroll taxes withheld from employees’ wages that they are required to deposit with the Treasury. Alternatively, the employer can request an advance of the tax credit from the IRS.
This post is provided for general information purposes and is not legal advice. As always, if you have any questions about this post or how it might impact your business, contact one of our attorneys.