The lockdown measures taken as the first line of defence against the Corona pandemic have severely impacted every business both large and small. The fallout of the economy has ensured a cash crunch for businesses to cover employee costs, rent, and other business costs incurred. It has quickly pushed the employers into unforeseen economic hardships which could further continue or even become worse: layoffs of thousands of employees were obviously on the line.
However, Trump Administration with its Coronavirus Aid, Relief, and Economic Security (CARES) Act has made a timely intervention to offer fast and direct economic relief and assistance for small businesses, individuals, families, medium, and large businesses to brave the economic impact of this Corona pandemic.
Under the CARES Act, a $2 trillion economic stimulus is injected into the economy in the form of tax provisions, business loans, unemployment benefits and Medicare & more.
CARES Act – Business Provisions:
Especially the treasury department has taken remarkable steps to preserve jobs of the Americans in industries that are severely impacted the COVID-19. The CARES Act has included the provision of financial support for the American job creators and businesses to help them support their employees and bring their business back on track successfully. And one such important provision under the CARES Act is Employee Retention Credit.
What is Employee Retention Credit under CARES Act?
Employee Retention Credit is a provision where the govt. provides tax credit to the businesses for keeping their employees on their working payroll. This fully refundable tax credit is given to the businesses to the tune of 50% of the wages that eligible employers pay their employees.
The total amount of this qualified wage taken into consideration here is capped at $10,000 and hence the maximum tax credit received by an eligible employer for the wages paid to the employee is $5000.
Who is an eligible employer?
An employer’s eligibility for the Employee Retention Credit is the determining basis of the 2020 calendar quarter. The tax credit for retained employees is made available for employers whose business operations have been partially or fully suspended during the 2020 calendar quarter due to the preventive measures taken by the government to curb the Corona pandemic.
In addition to the business whose activities were suspended, the credit can also be claimed by the employers whose gross receipts experienced a decline of more than 50% when compared to the same quarter in the 2019 calendar year. However, credit cannot be claimed by the employers after the business experience more than 80% of gross receipts compared to the corresponding 2019 calendar quarter.
For example, consider a business that has recorded following gross receipts for three quarters in 2019 & 2020:
| Quarters | 2019 | 2020 | % |
| First | $100,000 | $70,000, | 70% |
| Second | $120,000, | $50,000 | 41.6% |
| Third | $ 140,000 | $120,000 | 85.7% |
Consider that the business as recorded $100,000, $120,000, $ 140,000 in first, second and third quarter of 2019 and subsequently recorded $70,000, $50,000 & $120,000 in first, second and third quarters of 2020.
Then the employer can claim employer credit for the second and third quarters of 2020 as the gross receipts declined by more than 50%. However, he cannot claim for the fourth quarter of 2020 since his business has recorded 85.7% of receipts in the 3rd quarter as compared to the 3rd quarter of 2020.
What wages paid by the employer qualify for the Employee Retention Credit?
In general, the wages paid by the employers (defined as per FICA) to their employees from March 12, 2020, to December 31, 2020, are considered as qualified wages. However, there are several rules and regulations that are levied in order to make these wages qualified for ERC.
For example, employers with 100 or fewer employees working for them, can use all the employee wages paid to the employees irrespective of their current work status in the company to claim the credit. But as for the businesses with more than 100 employees, employers can only claim credit for the wages paid to the employees whose work has been suspended partially or completely due to the suspension of business operations. And qualified health plan expenses are allowed to be included in the wages for the ERC.
Moreover, paid leave wages, severance payments, and payment to individuals related to the employer are not considered qualified wages.
However, it is to be remembered that the total qualified wage eligible for 50% tax credit is capped at $10,000 for each eligible employee. For example, if an employee has been paid $7000 in the second and third quarts, an employer can claim $3500 on the second and $1500 on the third quarter in terms of tax credit (50%of $7000 + 50% of $7000 = 50% of $10,000).
The good news about the Employee Retention Credit under CARES Act is that eligible businesses need not wait until the filing of income tax return of 2020. At the end of each quarter, the tax credits will be reconciled on 941 of the employers. However, these changes increase the complexity of the quarterly filing of the employer. If you are one an eligible business who want to take leverage of this Employment Retention Credit, then our tax experts at Outsourced Bookkeeping services are more than ready to help you. You can contact us here: https://outsourcedbookeeping.com/
