As we know, on March 27th, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act. CARES added many new sections to the Internal Revenue Code (IRC) to assist both employers and employees during this time of economic uncertainty. A key tax-related provision of the Act is the Employee Retention Credit. This credit helps employers who are continuing to pay their employees, but whose business closed down, or whose revenues are substantially reduced due to COVID-19.
What is the Benefit of Employee Retention Credit?
The Credit is a refundable tax credit that the employer takes against their portion of Social Security taxes, up to a maximum of a $5,000 credit per employee.
Who is an Eligible Employer?
- A business whose operations are fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19; or
- A business that had a decrease in gross receipts of 50% or more when compared to the same quarter last year. For businesses that are claiming the credit based on a decrease in gross receipts, the credit period ends during the quarter that their gross receipts exceed 80% of the prior year.
What are Covered Wages?
- Wages and health plan costs paid from the date of the government authority order date and December 31, 2020
- The amount of wages also varies depending on the size of the employer
- Employers with more than 100 full-time employees include only employees who are not providing services due to COVID-19
- Employers with less than 100 full-time employees include all wages
To compute the number of employees the affiliated group rules are applied using the IRC Section 52 & 414 rules for pension plans.
Limitations
- Qualified wages for an employee may not exceed the amount the employee earned for working an equivalent duration during the 30 days immediately preceding the qualifying period. In other words, employers cannot increase an employee’s wages for purposes of computing the credit.
- The employer is not eligible if they receive a covered loan under the Paycheck Protection Program
- If the employer is allowed a work opportunity credit or employer credit for paid family leave such wages are not considered
If you believe you can qualify for the Employee Retention Credit and need assistance to assess its impact on your business, or the computation of the credit, we can help.
The above represents our best understanding and interpretation of the material covered as of the date of this post. Things are moving at a rapid pace, and as such, information is subject to change. This information is provided for informational purposes only and is not intended to be a substitute for obtaining accounting, tax, or financial advice from an accountant.
