Employee Retention Credit

Employee Retention Credit for Employers Subject to Closure due to COVID-19 (Section 2301 of the CARES Act)

March 30, 2020 - While the Families First Coronavirus Response Act (FFCRA) allows payroll credits for employers who are required to provide paid leave to employees affected by COVID-19, the employee retention credit under the CARES Act provides a credit based on the economic impact COVID-19 may place on an operating business.

The credit is for eligible wages paid from March 13, 2020, and through December 31, 2020, for eligible employers.  This new refundable payroll tax credit is equal to 50 percent of the qualified wages paid (including health benefits).  The total eligible wages per employee are $10,000, resulting in a maximum credit of $5,000 per employee.

This provision of the law provides a fully refundable credit against the employer’s 6.2% share of Social Security taxes. To the extent that the credit exceeds the employer’s share of FICA taxes for the quarter, the excess will be refunded to the employer.

Eligible employers. The credit is available to employers, including not-for-profits that meet the following criteria:

  1. Must have carried on a trade or business during calendar-year 2020; and
  2. The operation of that trade or business is either:
    1. With operations suspended by orders issued in response to COVID-19; or
    2. Has suffered a significant decline beginning with the first calendar quarter beginning after December 31,  2019, for which gross receipts for the calendar  quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and ending with the calendar quarter following the first calendar quarter beginning after a calendar quarter described above for which gross receipts of such  employer are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.
  3. Size of employer:
    1. 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; or
    2. 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 as a result of their employers' closure or reduced gross receipts are eligible for the credit.

For both eligible large employers and eligible small employers, “wages” has the meaning used for FICA tax purposes. Qualified wages also include the employer-paid portion of the employee’s group health plan premiums.   

The credit is not available to employers receiving Small Business Interruption Loans under Sec. 1102 (Paycheck Protection Program).

The employee retention provision provides special rules that prohibit an employer from obtaining both the retention credit under the CARES Act and either a “Work Opportunity Tax Credit” under Internal Revenue Code (IRC) Section 51 or an “Employer Credit for Paid Family and Medical Leave” under IRC Section 45S. Essentially, this precludes an employer from receiving a double benefit.

Please feel free to contact your Dermody, Burke & Brown tax advisor to further discuss any questions you may have.

 

The information reflected in this article was current at the time of publication.  This article will not be modified or updated for any subsequent tax law changes, if any.