Employee retention tax credits in the CARES Act

Last Updated: 4/6/2020

Employers have a new incentive to keep underutilized employees on their payroll during the COVID-19 outbreak. Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, certain employers (including tax-exempt entities) are eligible to have 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19.

To be eligible for these tax credits, a company must meet the following criteria:

Eligibility for payroll tax credits

Business operations are partially or fully suspended due to a COVID-19 shutdown order.

— OR —

Gross receipts declined by more than 50 percent when compared to the same quarter in 2019; credit applies to subsequent quarters unless gross receipts exceed 80 percent of gross receipts for the same quarter in the prior year.

— AND —

Under this law, companies that take an SBA loan under the CARES Act are not permitted to utilize the Employee Retention Tax Credits.

How is the credit calculated?

The amount of the credit is 50% of qualifying wages paid up to $10,000 in total. Wages paid after March 12, 2020, and before January 1, 2021, are eligible for the credit. Wages taken into account are not limited to cash payments, but also include a portion of the cost of employer-provided health care.

Depending on the size of your company, qualifying wages can vary. Note that the size of your company is based on the average number of employees a company had in 2019.

Company size

100 or fewer employees in 2019

More than 100 employees in 2019

Qualified wages

All employee wages (up to $10,000 per employee)

The credit is based on wages paid to all employees, regardless if they worked or not. If the employees worked full time and were paid for full-time work, the employer still receives the credit.

Wages from employees who are not providing services due to circumstances related to COVID-19 (up to $10,000 per employee)

The credit is allowed only for wages paid to employees who did not work during the calendar quarter.

How do I receive a credit if my business is eligible?

Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.

Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter. If the employer’s employment tax deposits are not sufficient to cover the credit, the employer may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.

For updates and more detail, take a look at the IRS Employee Retention Tax Credit FAQS and find additional, up-to-date information on the IRS Coronavirus page. This article will also be updated as the Treasury Department issues new information and guidelines. For additional information about CARES, FFCRA, and how your business can respond to the COVID-19 outbreak, please visit our COVID-19 Resource Center.

If you have questions about how the CARES Act or FFCRA impacts your business, please consult your legal advisor or tax professional.

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