CARES Act Includes Employee Retention Credit
The CARES Act, signed into law by President Trump on March 27, 2020, includes an unexpected employee retention credit that is available to employers.
The Employee Retention Credit (the ERC) is a credit against an employer’s portion of payroll tax for an eligible business that is forced to suspend or close operations due to COVID-19, or otherwise has a significant revenue decrease, and continues to pay its employees while not currently working.
How the Credit Works
For each quarter that a business is eligible, the business will receive a refundable credit against its 6.2 percent (Social Security and Railroad Retirement) employer portion of the payroll tax equal to 50 percent of “qualified wages” paid.
The amount of qualified wages per employee for all quarters cannot not exceed $10,000. The amount of qualified wages will depend on the business and its size.
- If the business had more than 100 employees in 2019, the qualified wages are limited to only those wages paid by the employer during the quarter for the period of time when the business was shut down.
- If the business had fewer than 100 employees in 2019, the qualified wages include wages paid when the business was shut down but also wages paid during each quarter where there was a sharp decline in year-over-year receipts (as described below).
Qualified wages include the value of health plan benefits. Any wages used in determining the new payroll tax credit for family medical leave or sick leave under the Families First Coronavirus Reponses Act may not be considered in determining qualified wages for the credit.
The ERC is only available for wages paid after March 12, 2020, and before January 1, 2021, and is refundable to the extent it exceeds the business’s payroll tax liability.
To be considered an eligible business, employers must have carried on a trade or business during 2020 and satisfy one of the following two tests:
- Business operations were fully or partially suspended during any quarter of 2020 due to orders from a governmental authority that limited commerce, travel or group meetings in response to COVID-19; or
- The business remained open but during any quarter in 2020 experienced a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50 percent. The business is entitled to the credit for each quarter until gross receipts for a quarter exceed 80 percent of receipts from the same quarter in 2019.
Tax-exempt organizations may also qualify for the ERC based on the tests outlined above.
An eligible business who receives a covered loan under paragraph 7(a) of the Small Business Act is not eligible for the ERC.
Delay of Employer Payroll Taxes
The CARES Act postpones the due date for the employer’s share of payroll taxes (6.2 percent) related to Social Security and Railroad Retirement for businesses. The deferred amounts would be payable over the next two years, with 50 percent due on December 31, 2021, and the remaining 50 percent due on December 31, 2022.