The Coronavirus Aid, Relief and Economic Security (CARES) Act created a number of relief vehicles to help business remain afloat. One that is not covered as much as some of the others is a new federal income tax credit to allow employers to keep paying their workers. The credit equals 50% of eligible employee wages paid by an employer in a 2020 calendar quarter and subject to an overall wage cap of $10,000 per eligible employee. Want to know more? Here are some answers to commonly asked questions.
Who is eligible?
Retention credit eligibility is determined on a 2020 calendar quarter basis. The credit is available to for-profit employers, as well as nonprofits, whose operations have been fully or partially suspended during a 2020 calendar quarter because of a governmental order that limits commerce, travel or group meetings due to COVID-19.
The retention credit can also be claimed by employers that have experienced a more than 50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding quarter in 2019. However, the credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 quarter.
To illustrate: Suppose a company’s 2020 gross receipts are as follows compared to 2019:
- First quarter: 86%
- Second quarter: 43%
- Third quarter: 92%
The company had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, it’s an eligible employer for purposes of the retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, it is ineligible because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.
What wages are eligible?
The retention credit is available to cover eligible wages paid from March 13, 2020, through December 31, 2020. For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.
For an employer that had more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours due to the employer’s closure or reduced gross receipts are eligible. The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee and includes allocable health plan expenses.
For example, a company pays an employee $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The credit for wages paid to the employee in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to the employee in the third quarter is limited to $1,000 (50% x $2,000) due to the $10,000 wage cap. Any additional wages paid to the employee are ineligible for the credit due to the $10,000 cap.
What other rules and restrictions apply?
The retention credit is not allowed for:
- Emergency sick leave wages or emergency family leave wages that small employers (generally those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA), because they’re covered by federal payroll tax credits granted by the FFCRA,
- Wages taken into account for purposes of claiming the pre-existing Work Opportunity Tax Credit, and
- Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave.
In addition, the retention credit isn’t available to small employers that receive a potentially forgivable Small Business Administration (SBA) Loan under the CARES Act’s Paycheck Protection Program.
How is the credit claimed?
Technically, an eligible employer’s allowable retention credit for a calendar quarter is offset against the employer’s liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee’s 2020 wages.
But the credit is “refundable.” That means an employer can collect the full amount of the credit even if it exceeds its federal payroll tax liability.
The allowable credit can be used to offset all of an employer’s federal payroll tax deposit liability, including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer’s tax deposit liability isn’t enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS.
Can you benefit?
If your business has suffered financially during the COVID-19 pandemic, the CARES Act’s 50% employee retention credit might help you keep workers on the payroll during the crisis. Keep in mind that additional guidance could be released on the credit or more legislation could be signed into law extending or expanding the credit. We will apprise you of any updates, and can help you determine whether you’re eligible and explore other tax-saving and financial assistance opportunities that may be available to you during this challenging time. Reach out to us with any questions.