Employee Retention Tax Credit Under the CARES Act
by Barry Salkin, Roberta Casper Watson and Livia Quan Aber
The Families First Coronavirus Response Act (the “FFCRA”) established tax credits under the Emergency Paid Sick Leave Act and the Emergency Family and Medical Leave Expansion Act. We have discussed these credits in a previous Law Alert. Most recently, the CARES Act added an employee retention credit.
The CARES Act employee retention tax credit is a fully refundable tax credit for employers equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000. The credit is treated as fully refundable because an eligible employer can receive a refund if, for any calendar quarter, the amount of the credit to which the employer is entitled exceeds the amount of social security taxes on all wages paid to all employees during the quarter. This credit is applied against the social security tax.
Eligible employers, for purposes of the employee retention credit, are employers that carry on a trade or business during calendar year 2020, including tax-exempt entities that either (i) fully or partially suspend operations during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or (ii) experience a significant decline in gross receipts during the calendar year. Governmental employers are not eligible for this credit, nor are self-employed individuals with respect to their own services.
If an employer operates in conjunction with a professional employer organization, the common law employer is entitled to the credit whether or not the professional employer organization is a certified professional employer organization. All entities treated as a single employer pursuant to the aggregation rules under Sections 52(a), 52(b), 414(m), and 414(o) of the Internal Revenue Code, are treated as a single employer for purposes of determining whether the employer (i) has more than 100 full-time employees; (ii) has a trade or business whose operations were fully or partially suspended due to orders from an appropriate governmental authority; (iii) had a significant decline in gross receipts; and (iv) is precluded from obtaining the credit because it has received a loan under the Payroll Protection Program.
The operation of a trade or business is partially suspended if an appropriate governmental authority imposes restrictions on the employer’s operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19 such that the employer can still continue some, but not all of its typical operations. A reduction in an employer’s hours of operation can be treated as a partial suspension. A partial suspension includes an employer whose workplace is closed for certain purposes but remains open for other purposes, or an employer that is able to continue certain operations remotely. An employer that operates in multiple locations that is subject to governmental orders limiting activities in some but not all jurisdictions would be treated as having a partial suspension of operations in all locations. If a trade or business is carried on by multiple members of a controlled group and the operations of one member of the group are suspended, then all members of the group are treated as having incurred a partial suspension of operations. If an essential business cannot receive critical parts or materials from a supplier because the supplier is affected by COVID-19, it is treated as having a partial suspension. However, an employer cannot qualify for the credit, even though its operations have been shut down by a governmental authority, if it can continue comparable operations through telework.
A significant decline in gross receipts begins with the first calendar quarter in 2020 in which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019. The significant decline in gross receipts is deemed to end as of the calendar quarter immediately following the first calendar quarter in which the employer’s 2020 gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter in 2021.
Qualified wages are wages paid by an eligible employer to some or all its employees after March 12, 2020, and before January 1, 2021, and also includes the qualified health expenses that are properly allocable to the wages. The definition of qualified wages is also dependent on the number of full-time employees (i.e., employees credited with at least 30 hours of service per week, 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 a period when the employee is not providing services due to an economic hardship attributable to a full or partial suspension of operations by the order of a governmental authority due to COVID-19, or a significant decline in gross receipts. For those 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 preceding the period of economic hardship. If the employer averaged 100 or fewer full time employees in 2019, qualified wages are wages paid to an employee during any period of economic hardship described above.
Qualified wages are wages subject to withholding of federal income tax and the employee’s and employer’s share of social security and Medicare taxes. Qualified wages are also considered wages for purposes of other benefits that an employer may provide, such as contributions to a 401(k) plan.