The CARES Act provides eligible employers with a retention tax credit if they keep employees on their payroll despite experiencing economic hardship related to COVID-19. The employee retention credit is a refundable credit.

Who Qualifies for the Credit?

The credit is available to all employers regardless of size, including tax-exempt organizations, except state and local governments and their instrumentalities and small businesses who take small business loans. In order to qualify for the credit, the employer must satisfy one of the following conditions:

1. The employer’s business must be fully or partially suspended by government order due to COVID-19 during the calendar quarter.
2. The employer’s gross receipts must fall below 50% of the comparable quarter in 2019. Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter.

The above conditions are calculated each calendar quarter.

How is the Credit Calculated?

Qualifying wages paid after March 12, 2020 and before January 1, 2021 are eligible for the credit. Wages include not only cash payments but the cost of employer provided health care. The amount of the credit is 50% of the wages paid to employees (subject to a $10,000 cap).

Qualifying wages are based on the average number of employees in 2019. If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for the time that the employee is not providing services due to either (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. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) and (2) above.

How is the Credit Claimed?

The credit is allowed against the employer’s portion of social security taxes. If for any calendar quarter the amount of the credit exceeds the employer portion of the social security tax on all wages paid to all employees, then the excess is treated as an overpayment and refunded to the employer. Eligible employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS by filing Form 7200 if the deposits are lower than the credit.

Retention Credit and Other Programs

An eligible employer may not receive the Employee Retention Credit if it receives a Small Business Interruption Loan under the Paycheck Protection Program that is authorized under the CARES Act.

An eligible employer who receives a credit for medical or family leave wages, may claim an employee retention credit so long as the amount of qualified wages for which the employer claimed the Employee Retention Credit do not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.

Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit for the employee.

Resources

For additional questions regarding the Employee Retention Credit see https://www.irs.gov/coronavirus/employee-retention-credit and https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act