To help reduce layoffs during the coronavirus (COVID-19) pandemic, the Coronavirus Aid, Relief and Economic Security (CARES) Act created a new federal income tax credit for employers that keep workers on their payrolls. The credit equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. It's subject to an overall wage cap of $10,000 per eligible employee. Here are answers to some FAQs about the retention credit.
What employers are eligible?
Eligible employer status for the retention credit is determined on a 2020 calendar quarter basis. The credit is available to employers, including nonprofits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel or group meetings due to COVID-19.
The retention credit can also be claimed by employers that have experienced a greater-than-50% decline in gross receipts for a 2020 calendar quarter compared to the corresponding 2019 calendar quarter. However, the credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 calendar quarter.
To illustrate: Suppose a company’s 2020 gross receipts are as follows compared to 2019:
- First quarter: 86%
- Second quarter: 43%
- Third quarter: 92%
The company had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, it’s an eligible employer for purposes of the retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, it’s ineligible because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.
What wages are eligible?
The retention credit is available to cover eligible wages paid from March 13, 2020, through December 31, 2020. For an eligible employer that had an average of 100 or fewer full-time employees in 2019, all employee wages are eligible for the credit (subject to the overall $10,000 per-employee wage cap), regardless of whether employees are furloughed due to COVID-19.
For an employer that had more than 100 full-time employees in 2019, only wages of employees who are furloughed or given reduced hours due to the employer's closure or reduced gross receipts are eligible for the retention credit (subject to the overall $10,000 per-employee wage cap, including qualified health plan expenses allocable to those wages).
The amount of wages eligible for the credit is capped at a cumulative total of $10,000 for each eligible employee. The $10,000 cap includes allocable health plan expenses. For example, a company pays an employee $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The credit for wages paid to the employee in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to the employee in the third quarter is limited to $1,000 (50% x $2,000) due to the $10,000 wage cap. Any additional wages paid to the employee are ineligible for the credit due to the $10,000 cap.
What other rules and restrictions apply?
The retention credit is not allowed for:
- Emergency sick leave wages or emergency family leave wages that small employers (generally those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA), because they’re covered by federal payroll tax credits granted by the FFCRA,
- Wages taken into account for purposes of claiming the pre-existing Work Opportunity Tax Credit, and
- Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave.
In addition, the retention credit isn't available to small employers that receive a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan under the CARES Act’s Paycheck Protection Program.
How is the credit claimed?
Technically, an eligible employer's allowable retention credit for a calendar quarter is offset against the employer's liability for the Social Security tax component of federal payroll taxes. That component equals 6.2% of the first $137,700 of an employee's 2020 wages.
But the credit is "refundable." That means an employer can collect the full amount of the credit even if it exceeds its federal payroll tax liability.
The allowable credit can be used to offset all of an employer's federal payroll tax deposit liability, apparently including federal income tax, Social Security tax and Medicare tax withheld from employee paychecks. If an employer's tax deposit liability isn't enough to absorb the credit, the employer can apply for an advance payment of the credit from the IRS.
Can you benefit?
If your business has suffered financially during the COVID-19 pandemic, the CARES Act’s 50% employee retention credit might help you keep workers on the payroll during the crisis. Keep in mind that additional guidance could be released on the credit or more legislation could be signed into law extending or expanding the credit. We can apprise you of any updates, help you determine whether you’re eligible and explore other tax-saving and financial assistance opportunities that may be available to you during this challenging time.
If you have any questions regarding accounting, domestic taxation, essential business accounting, international taxation, IRS representation, U.S. tax implications of Real Estate transactions or financial statements, please give us a call at 305-274-5811.
Source: Thomson Reuters