Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was an economic stimulus bill that was signed into law on March 27, 2020. One of the provisions of the CARES Act was the Employee Retention Credit, which provides payroll tax credits available for employers, including tax exempt organizations who retained employees during the COVID-19 pandemic. The goal is to help and provide financial assistance to employers during this time where business operations were disrupted and are not able to operate at full capacity.
Under the CARES Act, the credit provided a 50% tax credit for qualified wages that are subject to FICA taxes paid to employees with the maximum credit limit set at $5,000 annually ($10,000 of qualified wages x 50%). Qualified wages also include the cost of providing health benefits between March 12, 2020 and December 31, 2020.
On December 27, 2020, the Consolidated Appropriations Act (CAA) was signed and enacted effective January 1, 2021. The CAA extended and improved the Employee Retention Credit through June 30, 2021. The new credit rate is now 70% of qualified wages that are subject to FICA taxes (including the cost of providing health benefits) with the maximum credit limit set at $7,000 per quarter ($10,000 of qualified wages x 70%). This credit is available even if the employer has already received the credit in 2020.
To be eligible, one of the following two tests must be met by the business/employer applying for the credit. First is the business operations test. If the business is fully or partially suspended due to a lockdown order by the government related to the COVID-19 pandemic, then it passes for eligibility. If an employer does not qualify under this test, the employer may still qualify under the gross receipts test. Under the CARES Act, if the gross receipts of the business in 2020 is below 50% in a calendar quarter in comparison to the same calendar quarter in 2019, the employer is eligible for the credit. Furthermore, with the enactment of CAA, the gross receipts test was adjusted to below 80% in comparison to 2019 numbers.
In terms of the wage eligibility, under the CARES Act, businesses with over 100 employees were only allowed to take the credit on wages paid to employees who were unable to perform services due to the two tests detailed above—the business operation and gross receipts tests. No credit could be taken for wages paid to employees who are able to continue to provide service despite of the reduced business operation or gross receipts. However, businesses with less than 100 employees are eligible for the credit regardless if employees can provide service or not. Under the CAA, the employee threshold increased to 500. The rest of the original rules remain the same.
The other provision that was part of the CAA was to allow businesses who were granted Paycheck Protection Program (PPP) loan to be eligible for the employee retention credit. However, if PPP loan proceeds were used to pay the qualified wages and were forgiven or are expected to be forgiven, the credit may not be claimed. This change is retroactive effective at the beginning of the CARES Act enactment, which applies to qualified wages paid after March 12, 2020. The IRS has not provided a detailed guidance on this matter yet.
If you have any questions about the employee retention credit and how it could apply to your situation, contact us. We will be happy to help you claim this credit if your business is eligible.