Don’t Overlook the CARES Act’s Employee Retention Credit
Employers faced with difficult decisions about whether to lay off employees have been focusing their attention primarily on two relief measures in the recently enacted CARES Act: (1) the availability of forgivable Paycheck Protection Program (“PPP”) loans for employers who retain their employees on the payroll for eight weeks; and (2) the temporary expansion of unemployment benefits for workers who have lost their jobs because of the COVID-19 pandemic. Often overlooked in their analysis is the CARES Act’s Employee Retention Credit, which provides some relief to employers who do not receive a PPP loan.
What is the employee retention credit and what is the maximum amount of the credit?
Eligible employers are allowed a quarterly refundable credit against certain payroll taxes in an amount equal to 50% of the qualified wages, including certain health plan expenses, paid to an employee during the quarter. The maximum amount of wages (including the health plan expenses) paid to any employee that can be taken into account for purposes of the credit is limited to $10,000 for all calendar quarters. Thus, this credit is potentially worth $5,000 per employee.
Only wages paid after March 12, 2020 and before January 1, 2021 may qualify for the credit. To avoid double tax credits, the employee retention credit is not available with respect to wages for which the employer receives a credit against payroll taxes for required paid sick leave or required paid family leave under the Families First Coronavirus Response Act.
Which employers are eligible to receive the credit?
The credit is generally available to all non-governmental employers (including tax-exempt organizations) unless the employer (or certain of its affiliates) receives a covered loan under the PPP. However, to qualify as an eligible employer for a calendar quarter, either (1) the employer’s trade or business must be fully or partially suspended during the quarter by a government order due to COVID-19 or (2) the employer’s (and certain of its affiliates’) gross receipts from its trade or business for the quarter must be below 50% of the gross receipts for the corresponding calendar quarter in 2019, and, under this second test, the credit is no longer available after the quarter in which such gross receipts recover to more than 80% of the corresponding quarter in 2019.
Does it matter how many employees the employer has?
Yes. While smaller employers can seek the credit with respect to wages paid to any employee, if the employer (and certain of its affiliates) had more than 100 employees on average in 2019, then the credit is allowed only for wages paid to employees not providing services.
How does an employer receive the credit?
The credit is generally claimed by the employer when it files its quarterly federal employment tax return beginning with the second quarter. However, under certain circumstances, the IRS will permit an employer to receive the credit by reducing the amount of federal employment taxes it is required to deposit with the IRS or by applying to the IRS for advance payment of the credit. The employer would then account for this reduction or advance on its federal employment tax return.
Admittedly, if an employer has a choice between taking a forgivable PPP loan or taking the employee retention credit, the choice is likely to be a “no brainer.” However, when confronted with the choice of having employees apply for unemployment benefits — albeit more generous than usual — or keeping the employees on the payroll even though they are not working, the credit may make the second option easier to justify.
Please visit our Coronavirus: Preparation & Response series for additional resources we hope will be helpful.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.