CARES Act – Employee Retention Credit
By: Timothy Lynn
Section 2301 of the CARES Act provides for a refundable credit against employment taxes equal to 50 percent of the qualified wages with respect to each employee. There are numerous limitations and definitions that limit the scope and eligibility for the credit. However, for certain employers impacted significantly by COVID-19 shutdowns and who are maintaining their payroll, the credit may be the most valuable assistance available.
• Qualified wages are capped at $10,000 per employee (i.e., the credit per employee is capped at $5,000)
• The credit is first applied to reduce the employer’s portion of the Social Security portion of FICA (the 6.2% employer payroll tax)
• Any amount of credit in excess of the amount of payroll taxes owed for the calendar quarter is treated as an overpayment that shall be refunded under Section 6402(a) and 6413(b) of the Internal Revenue Code
• Any employer carrying on a trade or business in calendar year 2020 whose business operations are full or partially suspended during a calendar quarter due to orders from an appropriate governmental authority due to COVID-19 or which satisfies a significant decline of gross receipts test.
• For employers with more than 100 employees, Qualified Wages are wages paid by the employer to an employee who is not providing services due to government ordered shutdowns.
• For employers with 100 or fewer employees:
o If eligibility is because of a government ordered shutdown, then all employee wages are Qualified Wages for any quarter in which the governmental order is in effect;
o If eligibility is because of a qualifying decrease in gross receipts, all wages paid to any employee during each quarter in which they satisfy the decrease in gross receipts test are Qualified Wages.
The credit is calculated by calendar quarter, but only for the period March 12, 2020 to December 31, 2020.
The total wages for any employee cannot exceed $10,000 for all quarters (but does not need to be spread over the three potential quarters. There are rules to prevent increasing an employee’s compensation from what it was before March 12, 2020.
Qualified Wages includes costs paid or incurred by the employer for provision or maintenance of a group health plan (to the extent excluded from gross income of the employee).
If an employer receives an SBA 7(a) loan (including a Paycheck Protection Program Loan), it is not eligible for the credit.
Companies who have either been the subject of a governmental order for full or partial shutdown or have had a qualifying decrease in gross receipts should review this credit before closing on a Paycheck Protection Program loan.