A Closer Look at the Employee Retention Credit Under CARES Act Section 2301

On Friday, March 27, President Trump signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law. Although much of the attention within the CARES Act relates to the Paycheck Protection Program, a new employee credit was introduced to provide employers an incentive to keep their employees on the payroll. In essence, employers will be provided a refunded tax credit against their payroll taxes.

Below is a more detailed discussion of the Employee Retention Credit.

What is the Employee Retention Credit?

The Employee Retention Credit (“credit”) is a tax incentive built into the CARES Act that provides certain eligible employers, including 501(c) non-profits, the ability to keep their employees on the payroll and have a portion of their wages reimbursed to them by the federal government in the form of a refundable tax credit against their payroll taxes.

Who is considered an eligible employer?

An eligible employer is one who was carrying on a trade or business during 2020 and whose operations have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings during any calendar quarter during 2020.

An eligible employer is also defined as a business that remained open but suffered a significant decline in business for any calendar quarter during 2020. A significant decline is defined as business that has experienced a greater than 50 percent reduction in quarterly receipts, measured on a year-over-year basis.

How do you calculate the credit?

For an employer that had less than 100 average full-time employees in 2019:

The credit is 50 percent of all wages, including health benefits, paid to employees during an impacted quarter as described above.

For an employer that had greater than 100 average full-time employees in 2019:

Same as above, with the exception that the credit is 50 percent of only those wages paid to employees who are not working or have reduced hours during an impacted quarter.

Are there any limitations on the credit?

Wages paid during the period between March 13, 2020 and December 31, 2020 are eligible for the credit. The maximum amount of eligible wages to be considered for the credit is $10,000 per employee, leaving a potential maximum credit per employee of $5,000.

How does the employer receive the credit?

The credit is allowed against the tax imposed on the employer’s share of FICA taxes. If the credit for the quarter exceeds the employer’s overall FICA tax liability, the excess is refunded. In anticipation of receiving the credit, eligible employers can access federal employment taxes, including withheld taxes, which are required to be deposited by the IRS.

Is there interplay with other provisions and legislation?

The provision does include a denial of double benefit, meaning that the wages used to calculate the Employee Retention Credit cannot also be used to obtain tax credits under the paid leave provisions of the Families First Coronavirus Response Act; under IRC Sec. 45S, which allows employers to claim a tax credit for family leave wages if the employer has a written family leave policy in place that meets certain requirements; or for federal work opportunity tax credits. The employer’s deduction for wages is also reduced by the amount of the credit.

Further, employers are not eligible for the credit if they receive a Paycheck Protection Program Loan (“PPP Loan”) under Section 1102 of the CARES Act.

What else should I consider?

Those eligible employers who are seeking PPP loans should assess the immediate cash flow implications of the Employee Retention Credit and compare that to the potential forgiveness of the PPP loans. In some instances, the amount of the allowable loan under the PPP loans and the ultimate forgiveness may be less than that of the allowable Employee Retention Credit.

Eligible employers could also seek alternative financing through Economic Injury Disaster Loans, which would provide working capital while allowing the employer to utilize the Employee Retention Credit. In either case, the employer should track and account for these wages for use in this analysis, especially in an instance where a PPP loan application is unsuccessful.

The credit also provides relief to certain 501(c) non-profits that are ineligible for the Small Business Interruption Loan.

If you need assistance with this or any other COVID-19 related matters, please contact your Kreischer Miller relationship professional or any member of our team. We also continue to update our COVID-19 Resource Center, which you can access here.

Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.