The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – Update No. 3 – Employee Retention Credit

CARES Act Update No. 3:  Employee Retention Credit (provided April 8, 2020)

As you are aware, one of the primary goals of the CARES Act is to encourage employers to keep employees paid and employed, despite the difficulties and hardship resulting from the COVID-19 pandemic.  Last week, we addressed one of the primary ways Congress has tried to keep employees paid: the Paycheck Protection Program. This week, we are looking at the Employee Retention Credit.

At the outset, we must clarify that you cannot receive the Employee Retention Credit if you have already received or been approved for a loan under the Paycheck Protection Program.

The Employee Retention Credit is a fully refundable tax credit for employers equal to 50% of the first $10,000 in wages paid to an employee (including value of health plan benefits).  The credit applies to wages paid after March 12, 2020, and before January 1, 2021. The maximum credit for an eligible employer is $5,000 per employee.

To be an eligible employer, you must have carried on a trade or business during 2020 and satisfy one of the following two tests:

1. Have business operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings; or
2. Experience a significant decline in gross receipts during the calendar quarter.

The operation of a trade or business may be “partially suspended” if a governmental order imposes restrictions upon your business operations by limiting commerce, travel or group meetings due to COVID-19.  An example would be the Governor of Virginia ordering restaurants, bars and similar establishments to close in order to reduce the spread of COVID-19, however, those businesses can still offer carry-out, drive-through or deliveries.

Alternatively, a “significant decline in gross receipts” begins with the first quarter in which an employer’s gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline ends when gross receipts reach greater than 80% of gross receipts in the same calendar quarter in 2019.

So how do you apply for this credit?  Eligible employers will report their total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, usually Form 941, Employer’s Quarterly Federal Tax Return. Therefore, the eligible employer may get a refund if the amount of the credit is more than what the employer owes in respect of federal employment taxes. Alternatively, in anticipation of receiving the credits, eligible employers may reduce the amount of federal employment taxes it deposits for that quarter by the amount of credits it qualifies for.

For example:  An employer paid $10,000 in wages (including health plan expenses) and is therefore entitled to a $5,000 credit, and is otherwise required to deposit $8,000 in federal employment taxes, including taxes withheld from all of its employees, for wage payments made during the same quarter as the $10,000 in qualified wages.  The employer may keep up to $5,000 of the $8,000 of taxes the Eligible Employer was going to deposit, and it will not owe a penalty for keeping the $5,000.  The employer is required to deposit only the remaining $3,000 on its required deposit date. The Eligible Employer will later account for the $5,000 it retained when it files Form 941, Employer’s Quarterly Federal Tax Return, for the quarter. (Example adapted from the IRS FAQs page: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act)

Note: for employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit.

Finally, an employer may receive both the tax credits for the qualified leave wages under the Families First Coronavirus Response Act (“FFCRA”) and the Employee Retention Credit under the CARES Act, however, not for the same wages. The amount of wages for which an eligible employer may claim the Employee Retention Credit must not include the amount of qualified sick and family leave wages for which the employer received tax credits under the FFCRA.