Employee Retention Credit

Employers not receiving small business interruption loan under the Paycheck Protection Program may be eligible for the Employee Retention Credit (the “Credit”).  The Credit, enacted on March 27, 2020 as part of the CARES Act, was created to encourage ‘eligible employers’ financially impacted by the COVID-19 to keep employees on their payroll.  The Credit amount can be used to reduce federal employment payroll tax obligation, and the remaining Credit balance can be refunded.

Here are some key rules:

The Credit is a fully refundable tax credit for eligible employers equal to 50% of qualified wages paid between March 12, 2020 and before January 1, 2021.  The maximum amount of qualified wages qualified for the Credit is $10,000 for each employee, so the maximum credit for qualified wages paid to any employee is $5,000.

Eligible Employers for the purposes of the Credit are those that carry on a trade or business during calendar year 2020 that either:

• Fully or partially suspends operation during any calendar quarter 2020 due to orders from appropriate government authority limiting commerce, travel, or group meetings due to COVID-19; or
• Experience a significant decline in gross receipts (more than 50% as compared to comparable quarter in 2019) during the calendar quarter.

Qualified wages are wages and compensation paid by an eligible employer to employees after March 12, 2020 and before January 1, 2021.  Qualified wages are based on the average number of full-time employees employed by the eligible employer during 2019:

• If the eligible employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to the circumstances that caused the employer to be an eligible employer, relating to mandated suspensions or significant declines in gross receipts. Qualified wages 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 wages paid to any employee during any period of economic hardship due to the circumstances that caused the employer to be an eligible employer, relating to mandated suspensions or significant declines in gross receipts.

Here is an illustration to show how significant this Credit is.  Assume that Company X is qualified employer with 10 employees each making $60,000 annual salary.  Company X’s business has been partially suspended during Q2 of the calendar year 2020. The credit that Company X is entitled to is  $50,000, of which $11,250 can be applied to cover employer payroll tax obligation and the remaining $38,750 can be refunded, as illustrated below.

Qualified wages ($10,000 x 10 employees)                             $100,000

Credit percentage                                                                                   50%

Employee Retention Credit amount                                             $50,000

Applied to reduce payroll tax                                                                    ($15,000 x 7.5% x 10 employees)                                                   $11,250

Eligible for refund                                                                                     $38,750

So during Q2 2020, Company X incurred $150,000 of compensation expense but the government effectively subsidized $50,000 through the Employee Retention Credit.

For more details, please see

Notice 2020-22  https://www.irs.gov/pub/irs-drop/n-20-22.pdf

IRS’ Q&A  https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act