COVID-19 Employee Retention Credit
COVID-19 continues to have detrimental effects across the globe in many ways uncovering the need for a COVID-19 Employee Retention Credit. In the United States, many states have enacted stay-at-home orders. These measures to prevent its spread. Although necessary, these measures have devastated entire industries. This leads employers to wonder if they will have to shut down and employees to wonder if they still have a job.
On March 27, 2020, the federal government enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). This is in response to the destruction caused by COVID-19. It was designed to encourage Eligible Employers to keep employees on their payroll despite the economic hardships. The CARES Act includes a tax credit called the Employee Retention Credit (Credit).
What is the Credit?
It is a fully refundable tax credit for Eligible Employers equal to 50% of total qualified wages, including allocable qualified health plan expenses. It applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000. Therefore, the maximum credit for an Eligible Employer for qualified wages paid to any employee is $5,000.
Does my business qualify for the Credit? The credit is available to all employers regardless of size, including tax-exempt organizations.
There are two exceptions:
- State and local governments and their instrumentalities.
- Small businesses that receive a Small Business Interruption Loan (“Paycheck Protection Loan”) under the Paycheck Protection Program authorized under the CARES Act.
There are two ways to qualify:
- The employer’s business is fully or partially suspended by government orders limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 during the calendar quarter.
- The employer experiences a significant decline in gross receipts that are below 50% of the comparable quarter in 2019.
- Once gross receipts exceed 80% of a comparable quarter in 2019, they are no longer eligible after the end of that quarter.
- These measures are calculated each calendar quarter.
- Note: Self-employed individuals cannot receive this credit for self-employment services or earnings.
What are qualified wages?
Qualified wages are wages and compensation paid by an Eligible Employer to employees after March 12, 2020, and before January 1, 2021. This includes the Eligible Employer’s qualified health plan expenses that are properly allocable to the wages. Qualified wages taken into account for an employee cannot exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
The definition of qualified wages is partially dependent on the average number of full-time employees employed by the Eligible Employer during 2019.
- Employees with more than 100 employees: credit is allowed only for wages paid to employees who did not work during the calendar quarter for one of two reasons: (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.
- Employers with less than 100 employees: credit is based on wages paid to all employees, regardless if they worked or not, during any period of economic hardship due to (1) or (2) described above.
Do I have to claim the Credit?
No. The CARES Act does not require employers to pay qualified wages; therefore Eligible Employers are not required to claim the Employee Retention Credit.
Does the Credit apply against any employment taxes?
Yes. It is allowed against the employer portion of social security taxes and the portion of taxes imposed on railroad employers under section 3221(a) of the Railroad Retirement Tax Act (RRTA), which corresponds to the social security taxes.
What makes the Credit fully refundable?
It is fully refundable, because the Eligible Employer can get a refund if the amount of the credit is greater than certain federal employment taxes that the Eligible Employer owes. For any calendar quarter the amount of the credit the Eligible Employer is entitled to exceeds the employer portion of the social security tax on all wages paid to all employees (or on all compensation for employees subject to RRTA), the excess is treated as an overpayment and refunded to the employer. The excess will be applied to offset any remaining tax liability on the employment tax return. The amount of any remaining excess will be reflected as an overpayment on the return. Like other overpayments of federal taxes, the overpayment will be subject to offset prior to being refunded to the employer.
If I am an eligible employer, how do I receive the Credit?
Eligible employers can immediately be reimbursed for the Credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. Eligible employers must report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns (typically Form 941) beginning with the second quarter.
If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS if they submit Form 7200, Advance Payment of Employer Credits Due to COVID-19. Additionally, eligible employers can request an advance of the Employee Retention Credit by submitting the same Form 7200.
If I am an eligible employer, can I receive tax credits for both the Credit and the Families First Coronavirus Relief Act (FFCRA)? Yes. However, the same wages cannot be counted for both the Employee Retention Credit and the FFCRA. The FFCRA requires certain employers to pay sick or family leave wages to employees unable to work or telework due to particular circumstances in relation to COVID-19. Under FFCRA, employers are entitled to a refundable tax credit for the required leave paid, up to specified limits.