As the coronavirus crisis forced numerous businesses across the country to halt or reduce their operations, the federal government enacted the Coronavirus Aid, Relief and Economic Security (CARES) Act in an effort to mitigate economic harm for individuals and businesses alike. Offering approximately $2 trillion in stimulus funding and tax relief, the CARES Act is a powerful measure that will likely impact most Americans. While the Act’s Paycheck Protection Program (PPP) has received significant attention, another provision may also offer immediate financial relief for businesses: the Employee Retention Credit (ERC).
What is the Employee Retention Credit?
Designed to incentivize organizations to keep employees on payroll during the crisis, the ERC is a tax credit for employers equal to 50 percent of qualified wages (including health plan expenses) paid between March 12, 2020 and January 1, 2021. A maximum of $10,000 of qualified wages may be taken into account for each employee, for a total credit amount of up to $5,000 per employee. The ERC is applied against employer-paid Social Security taxes—allowing eligible employers to quickly boost cash flow by reducing their payroll tax burdens by up to 50 percent of qualified wages.
The ERC is considered fully refundable because employers may receive a refund if the amount of the credit is greater than the employer’s share of Social Security taxes on all wages paid to employees. In that case, the excess credit amount will be considered an overpayment and may be used to offset any remaining employment tax liability.
Which organizations are eligible for the Employee Retention Credit?
Businesses of all sizes, including tax-exempt organizations, may qualify for the ERC if they either:
- Were required to fully or partially suspend operations during any quarter in 2020 due to governmental orders restricting commerce, travel, or group meetings as a result of the pandemic; or
- Experienced a decline in gross receipts of at least 50 percent compared to the same quarter in the previous year.
Governmental contractors and self-employed individuals are not eligible for the ERC. The ERC may be more beneficial to organizations with 100 or fewer full-time employees; these organizations can claim the credit for wages paid to any employee, whether or not they were working during the time that the organization was impacted by COVID-19. Organizations with more than 100 employees, on the other hand, can only take into account wages paid to employees who were working reduced hours or not working at all.
Employee Retention Credit and the Payroll Protection Program (PPP)
The IRS prohibits organizations from claiming the ERC if they have also received a PPP loan under the CARES Act. For some organizations, the credit may offer a more straightforward way to improve cash flow rather than navigating the complex application requirements of the PPP. In addition, the ERC allows businesses greater flexibility in determining how and when to bring employees back to work. Businesses that are considering which opportunity to pursue should consult with their tax or financial advisors in order to determine how these two programs and other provisions of the CARES Act may affect them.
As your business explores options for financial relief under the CARES Act, our team of tax and financial experts is available to help you develop the optimal strategy to suit your needs. Contact us today to schedule a consultation!
-Stephanie Vance, J.D.
(Sources: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-general-information-faqs, https://www.shrm.org/ResourcesAndTools/hr-topics/talent-acquisition/Pages/ERC-New-Tax-Credit-Helps-Small-Businesses-Keep-Staff-During-Pandemic.aspx).
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