The coronavirus (COVID-19) pandemic has shut down many sectors of the U.S. economy, causing widespread job losses. Over 10 million Americans applied for unemployment benefits in March, according to the U.S. Department of Labor. And far more claims are expected in April. Some economists predict that the unemployment rate could rise to Depression-era levels of 10% to 15% before the crisis ends (compared to 3.5% in February 2020).
To help curb layoffs, Congress has created a new federal income tax credit for employers that keep workers on their payrolls. The credit amount 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 the details.
Eligible employer status for the 50% employee 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 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 ACE, a limited liability company (LLC), reports the following quarterly gross receipts for 2019 and 2020:
|First Quarter||Second Quarter||Third Quarter|
|2019 Gross Receipts||$210,000||$230,000||$250,000|
|2020 Gross Receipts||$180,000||$100,000||$230,000|
|2020 as % of 2019||86%||43%||92%|
In this example, ACE had a greater-than-50% decline in gross receipts for the second quarter of 2020. So, ACE is an eligible employer for purposes of the 50% employee retention credit for the second and third quarters of 2020. For the fourth quarter of 2020, ACE is ineligible for the credit because its gross receipts for the third quarter of 2020 exceeded 80% of gross receipts for the third quarter of 2019.
The 50% employee retention credit is available to cover eligible wages paid between March 13, 2020, and 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 credit (subject to the overall $10,000 per-employee wage cap).
For purposes of the 50% employee retention credit, eligible wages are increased to include qualified health plan expenses allocable to those wages.
Important: 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, Alpha Co. is an eligible employer that pays $10,000 in eligible wages to an employee (Art) in the second quarter of 2020. The 50% employee retention credit is allowed for the wages. The credit equals $5,000 (50% × $10,000).
Alpha pays another employee (Bart) $8,000 in eligible wages in the second quarter of 2020 and another $8,000 in the third quarter of 2020. The 50% employee retention credit for wages paid to Bart in the second quarter is $4,000 (50% x $8,000). The credit for wages paid to Bart 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 Bart are ineligible for the credit due to the $10,000 wage cap.
Additional Rules and Restrictions
The 50% employee retention credit is not allowed for:
- Emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA). Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA.
- Wages taken into account for purposes of claiming the pre-existing Work Opportunity Credit under Internal Revenue Code (IRC) Section 21.
- Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave under IRC Sec. 45S.
In addition, the 50% employee retention credit isn’t available to a small employer that receives a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan issued pursuant to the Paycheck Protection Program under the CARES Act. That program has been funded with $349 billion, so far. In general, a small employer for purposes of the Paycheck Protection Program is one that has fewer than 500 employees — including a sole proprietorship, self-employed person or private nonprofit organization. Businesses in certain industries can have more than 500 employees if they meet SBA size standards for those industries. For additional information on the Paycheck Protection Program, visit the SBA website or check out our list of updates and resources on our dedicated COVID-19 page.
Claiming the Employee Retention Credit
Technically, an eligible employer’s allowable 50% employee 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 a so-called “refundable” credit. That means an employer can collect the full amount of the credit even if it exceeds the aforementioned 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. Your tax advisor can help you submit the correct form to the IRS.
The following example shows the mechanics of the refundable credit: Beta Corporation is an eligible employer. Beta paid $20,000 of eligible wages and is, therefore, entitled to a 50% employee retention credit of $10,000. The company has an upcoming quarterly federal payroll tax deposit obligation of $8,000, which includes taxes withheld from its employees on wage payments made during that quarter. Beta can keep the entire $8,000 as part of its allowable 50% employee retention credit — and then the company can file a request for an advance payment of the remaining $2,000 credit.
No employer wants to lay off employees during these difficult times, but sometimes it’s the only way to stay afloat. The 50% employee retention credit rewards employers that can afford to keep workers on the payroll during the crisis. Contact us if you have questions about this tax saving opportunity.