The Employee Retention Credit in the CARES Act

With shutdowns across the country, America has entered unchartered waters, and everyone is trying to figure out what it means for them. Lawmakers are doing what they can to help, but what ends up coming out of Washington, DC are massive pieces of legislation that cover millions of people but are difficult to understand.

The latest legislation, the Coronavirus Aid, Relief and Economic Security Act (CARES Act), is huge. 335 pages to be exact. It’s aimed at helping almost every American that’s suffering because of the COVID-19 outbreak and that means there’s a lot to dig in to. For a small business, it’s tough to know what’s for you and what’s not.

What should small business owners look at in the CARES Act?

If you’re a small business owner that’s struggling to do right by your employees whether the doors remain open or not, then the Employee Retention Credit within the CARES Act is what you want to be focusing on first.

As the IRS website states, the credit “…is designed to encourage Eligible Employers to keep employees on their payroll, despite experiencing economic hardship related to COVID-19…” In other words, don’t fire them, the IRS will try to help you keep them.

What do I need to know about the Employee Retention Credit?

There are three keys to the Employee Retention Credit:

  • The credit is 50 percent of the qualified wages and that includes qualified health plan expenses.
  • It applies to qualified wages paid after March 12, 2020, and before January 1, 2021.
  • The maximum amount you can claim for each employee is $10,000 which means $5,000 in credit.

How do you know if your business is eligible for the Employee Retention Credit?

To be an eligible employer, you need to conduct business in 2020 and face one of two hardships.

One, you’re forced to fully or partially suspend your business operations because a government authority told you to. That means the mayor of your city or your state’s governor issued a stay at home order that affected your business.

Or two, you see a significant decline in gross receipts during a calendar quarter. The decline must be 50% or greater to be considered significant. So, if the gross receipts from Q1, Q2, and Q3 of 2019 significantly better than those in Q1, Q2, and Q3 of 2020 then you would be considered an eligible business.

The self-employed are not eligible for this credit.

What else should I know about the Employee Retention Credit?

The cool thing about the Employee Retention Credit is that it’s a tax credit, which means it’s fully refundable. A fully refundable credit is awesome because it means if your credit exceeds the amount that you owe in taxes, then you get that money back.

The credit is applied to the employer owed portion of social security taxes, in other words, the social security taxes that are paid by the employer on behalf of the employees.

The federal government has worked out a system of allowing employers to divert funds currently owed to the federal government in taxes to employee wages. But doing that is a lot more complex than it sounds. If you need to use taxes you currently owe to pay your employees, I suggest that you talk to your tax adviser or contact us here at Tax Credit Group before you start. There may be some ins and outs of the system that you may not understand, and it would be good to talk them through with someone who does understand.

Tax Credit Group has tried to follow all of the things happening on Capitol Hill during this crisis and we’ve tried to share with you as much as we can. If you’re looking for details on the other small business help that’s coming out of Congress, then take a look at the blog post we did on the Families First Coronavirus Act in March.

We also gathered together some of the key federal sites to look at for COVID-19 updates as they come out of Congress. You can find that here.

And if you’re one of the lucky businesses that are growing during this time and looking to hire new employees, I strongly urge you to consider hiring people that qualify for the Work Opportunity Tax Credit. It’s a credit that a lot of employers are missing out on because they simply don’t know about it.