CARES Act: Employee Retention Credit

Posted by Matt Peck, CPA, Partner, Tax Services on Apr 2, 2020

The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains immediate payroll tax relief to certain employers. The employee retention credit cannot be utilized by an employer who receives a section 7(a) SBA loan or CARES loan.

The CARES Act provides a credit to certain employers affected by COVID-19. The employer must have been carrying on a trade or business during 2020 to be an eligible employer for this credit. In addition, the employer must have either been:

  • Ordered by a competent governmental authority to suspend or reduce business operations due to concern about the spread of COVID-19, or
  • Suffered a significant decline in business during a 2020 calendar quarter. This is deemed to occur if an employer’s gross receipts are 50 percent or less than the gross receipts of the same calendar quarter in the previous year.

Once an employer becomes an eligible employer on account of a significant decline in gross receipts, the employer remains an eligible employer until the employer’s gross receipts during a calendar quarter are 80 percent or more than the gross receipts of the same calendar quarter in the previous year.

It is important to note that 501(c) organizations have access to this credit.

The employee retention credit is not available to employers that receive a loan under section 7(a) of the Small Business Administration, including SBA Economic Injury Disaster Loan (EIDLs) or a CARES Paycheck Protection Program loan.

The credit is equal to 50 percent of the qualified wages paid by a qualified employer to an employee.  The credit is allowed to offset the employer portion of the OASDI payroll tax (6.2%) or employment taxes related to the Tier 1 Railroad Retirement Act.  If the credit for the quarter exceeds the employer’s overall payroll tax liability, the excess will be refunded.

The credit is allowed with respect to eligible wages.  For employers who had an average number of full-time employees in 2019 of 100 or fewer, all employee wages are eligible regardless of whether the employee is furloughed.  For employers who had a larger average number of full-time employees in 2019, only the wages of employees who are furloughed or face reduced hours are eligible for the credit.

The term “eligible wages” includes health benefits and is capped at the first $10,000 in wages paid to eligible employees. 

Only wages paid during the period between March 13, 2020, and December 31, 2020, are eligible for the credit. Wages paid by an employer that qualify for the credit under the recently enacted Families First Coronavirus Response Act, are not includible in the wages for this credit.

 


Please reach out to us about your specific situation before proceeding and also for assistance with the process. Stay informed about future developments by frequently visiting our COVID-19 Financial Updates page.

Topics: Accounting Tips, Tax, coronavirus, COVID-19, CARES Act

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