March 27, 2020
COVID-19: US Economic Stimulus Bill Includes Employee Retention Credit for Employers
The Coronavirus Aid, Relief, and Economic Security (CARES) bill (H.R. 748) includes a significant tax incentive to keep employees on payroll in the form of a new “employee retention credit.” The House passed the Senate’s version of the CARES bill today, and President Trump indicated he will sign the bill into law when it reaches his desk.
The employee retention credit is a payroll tax credit equal to 50 percent of “qualified wages” paid by “eligible employers” to certain employees during the COVID-19 crisis. The credit applies against the employer’s share of FICA (social security) tax. The credit is capped at $10,000 per employee.
To the extent that the credit exceeds the employer’s share of FICA taxes for the quarter, the excess will be refunded to the employer. The bill grants the Internal Revenue Service the authority to advance tax credit payments to eligible employers and to waive deposit penalties for employers that do not make payroll tax deposits in anticipation of receiving the credit. The credit will apply to wages paid between March 12 and December 31.
An “eligible employer” means any employer conducting a trade or business in 2020—including tax-exempt entities—the operations of which have been fully or partially suspended as a result of a government order limiting commerce, travel, or group meetings, or that have experienced a reduction over 50 percent in quarterly receipts measured against the same quarter last year.
The bill defines “qualified wages” differently for employers who employed more than 100 full-time employees in 2019 (eligible large employers) and employers who employed 100 or fewer full-time employees in 2019 (eligible small employers). For eligible large employers, “qualified wages” means wages paid to an employee who is not performing services for the employer (e.g., a furloughed employee remaining on the employer’s payroll). For eligible small employers, “qualified wages” include all wages paid by the employer regardless of whether the employee is performing services for the employer. The number of an employer’s full-time employees in 2019 is determined under the methodology established under the Affordable Care Act.
For both eligible large employers and eligible small employers, “wages” has the meaning used for FICA tax purposes. Qualified wages also include the employer-paid portion of the employee’s group health plan premiums.
Coordination With Tax Credit for Coronavirus-Related Mandatory Paid Leave
Signed into law on March 18, the Families First Coronavirus Response Act (FFCRA) requires most employers to provide up to 80 hours of paid sick leave of up to $511 per day to employees quarantined due to COVID-19 or self-quarantined while seeking a medical diagnosis. The FFCRA also requires employers to provide up to 80 hours of paid leave of up to $200 per day to employees who take leave to care for a family member or child whose school or daycare center is closed. The FFCRA includes a mandatory paid leave credit against payroll tax for 100 percent of the mandatory paid leave.
For purposes of the employee retention credit, qualified wages do not include wages taken into account for purposes of the mandatory paid leave credit. An employer that claims both credits must apply the mandatory paid leave credit first, followed by the employer retention credit.
Coordination With Other Employer Tax Credits
The employer retention credit is not available with respect to an employee for any period for which the employer is allowed a work opportunity credit with respect to the employee. Wages taken into account for the employer credit for paid family and medical leave (Internal Revenue Code Section 45S) are not eligible for the employee retention credit.
The credit is not available to employers receiving small business interruption loans under the CARES bill.