IRS Releases Information Regarding Employee Retention Credit

The IRS has posted a summary description of the employee retention tax credit that was enacted as part of the CARES Act (see IRS: Employee Retention Credit available for many businesses financially impacted by COVID-19). The IRS also posted a frequently asked question page regarding the credit (see FAQs: Employee Retention Credit under the CARES Act).

The employee retention credit is a credit against the employer portion of social security tax and generally is available to employers that either (a) fully or partially suspended operations during any calendar quarter in 2020 due to orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19 or (b) experience a significant decline in gross receipts during a calendar quarter. For this purpose, an employer experiences a significant decline in gross receipts during a calendar quarter if the employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of its gross receipts for the same calendar quarter in 2019.

The amount of the employee retention credit is equal to 50 percent of an employer’s qualified wages paid to each employee per quarter, up to a maximum amount of $10,000 of qualified wages per employee for the year.

The FAQs include two helpful examples describing the calculation of the employee retention. In the first example, an eligible employer pays $10,000 in qualified wages to an employee in the second quarter of 2020. The amount of the credit with respect to such wages is $5,000 (50 percent of $10,000).

In the second example, an eligible employer pays $8,000 in qualified wages to an employee in the second quarter of 2020 and $8,000 in qualified wages to the employee in the third quarter of 2020. The amount of the credit with respect to such wages $4,000 in the second quarter (50 percent of $8,000) and $1,000 in the third quarter due to the overall limit on qualified wages per employee of $10,000, which limits the maximum amount of the credit per employee to $5,000 (50 percent of $10,000) for the year.

The credits are fully refundable if and to the extent the amount of the credit for a particular quarter is greater than the amount an eligible employer owes in employer social security taxes for the quarter. If for any calendar quarter the amount of the credit to which an eligible employer is entitled exceeds the employer portion of the social security tax on all wages paid to all employees, the excess is treated as an overpayment and may be refunded to the employer.

The FAQs provide a helpful example of the refundability of the credit. In the example, an eligible employer pays $10,000 in qualified wages to an employee in the second quarter of 2020. The credit available to the employer for the qualified wages paid to the employee is $5,000. This amount may be applied against the employer share of social security taxes for which the employer is liable with respect to all employee wages paid in second quarter of 2020. Any amount by which the available credit exceeds the employer’s share of social security taxes is treated as an overpayment and refunded to the employer after offsetting other tax liabilities on the employment tax return, and subject to certain other offsets.

The FAQs cover a number of basic issues related to the credit, including which employers qualify for the credit, how to determine whether an employer is qualified, what wages are constitute qualified wages, how much of the credit may be refunded to an employer, and how to claim the credit.

The CARES Act also allows employers to defer payment of the employer portion of social security taxes for wages paid after March 27, 2020 and before January 1, 2021. Half of the deferred tax must be paid by December 31, 2021, and the remainder must be paid by December 31, 2022. An employer may not take advantage of the deferral if the employer has had a loan forgiven under the paycheck protection program of the CARES Act. An employer is able to take advantage of the deferral regardless of whether the employer qualifies for the employee retention tax credit. An employer that qualifies for both the employee retention credit and the employer tax deferral, however, must elect not to defer employer taxes to receive a refund at the earliest possible time.

Stoel Rives has a dedicated team of experts prepared to answer your questions regarding the CARES Act, including the employee retention tax credit. Please contact one of the key contributors to this alert.