Enacted on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) provides an employee retention tax credit (“Employee Retention Credit”) to encourage “Eligible Employers” to keep employees on their payroll.
The Employee Retention Credit is a fully refundable tax credit for employers. It equals to 50% of “qualified wages” that “Eligible Employers” pay to their employees and applies to “qualified wages” paid after March 12, 2020, and before January 1, 2021. The credits are fully refundable because the Eligible Employer may get a refund if the amount of the credit is more than certain federal employment taxes the Eligible Employer owes.
“Eligible Employers” are those that carry on a trade or business during calendar year 2020, including a tax-exempt organization, that either: (a) fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or (b) experience a “significant decline in gross receipts” during the calendar quarter. A “significant decline in gross receipts” begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts ends with the first calendar quarter in which the employer’s 2020 gross receipts for that quarter are greater than 80 percent of its gross receipts for the same calendar quarter in 2019. Self-employed individuals are not eligible for this credit for self-employment services or earnings.
“Qualified wages” are wages and compensation paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021 (including allocable qualified health plan expenses). If an Eligible Employer has more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship. If the Eligible Employer has 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.
The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit an Eligible Employer can get for qualified wages paid to any employee is $5,000. To claim the refundable tax credit, Eligible Employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns. Eligible Employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.
It should be noted that an employer may not receive the Employee Retention Credit if an Eligible Employer receives a Small Business Interruption Loan under the Paycheck Protection Program under the CARES Act.