COVID-19 Employee Retention Credit under the CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted on March 27, 2020 and authorized an unprecedented $2 trillion economic recovery package. For employers, the Employee Retention Credit was launched to encourage employers to keep employees on their payroll.

Who is eligible for the credit?

The credit is available to employers who are carrying on a trade or business during the 2020 calendar year (employers other than governmental employers or self-employed individuals). Employer’s eligibility is determined for each calendar quarter in 2020 if they meet one of the following qualifications:  

• Employer’s business is fully or partially suspended by a governmental order related to COVID-19 limiting commerce, travel or group meetings. Based on IRS guidance, partially suspended means that business can still continue to operate but not at its normal capacity.  
• They experience a significant decline in gross receipts, or gross receipts less than 50% compared to the same calendar quarter in 2019. Eligibility terminates at the end of the quarter once gross receipts go above 80% for the same quarter in 2019.

How much is the credit?

The Employee Retention Credit is a refundable credit against the employer portion of social security taxes. It is calculated at 50% of qualified wages up to $10,000 for all applicable quarters per employee, including the cost of employer provided healthcare. The maximum credit for qualified wages paid to any employee is $5,000.

What are qualified wages?

The period subject to qualified wages is between March 13, 2020 and December 31, 2020.

For employers who had more than 100 full-time employees on average in 2019, qualified wages are the wages paid to employees for the time that they are not providing services.  

For employers with an average of 100 or fewer full-time employees during 2019, qualified wages are the wages paid to their employees, regardless of whether or not employees are providing services.

There are additional restrictions for employers who are utilizing the following COVID-19 programs or tax credits: 

• The Employee Retention Credit cannot be claimed if receiving a loan under the Paycheck Protection Program (PPP) through the Small Business Administration.
• Wages considered for the Employee Retention Credit cannot be considered for Families First Coronavirus Response Act (FFCRA) or the credit for paid family and medical leave.
• Employees included in the Work Opportunity Tax Credit (WOTC) are excluded from the Employee Retention Credit.

How is the credit claimed?

Starting with the second quarter of 2020, to claim the credit, eligible employers should report their total qualified wages and applicable health insurance costs for each quarter on their quarterly employment tax returns. Credit amounts exceeding the tax due will be paid to the employer. Eligible employers can also request an advance payment by filing Form 7200 advance payment of employer credits due to COVID-19.

How Duff & Phelps can help

Duff & Phelps' Site Selection and Incentives Advisory team can provide guidance on employer eligibility/qualified wages, credit calculation or assist with other technical matters.