CARES Act Part III: Employee Retention Credit Provision for Employers

As an incentive for businesses who have been hit hard by the economic effects of the COVID-19 crisis to halt further layoffs, Section 2301 of the CARES Act has introduced the Employee Retention Credit for Employers Subject to Closure Due to COVID-19.

Note that businesses receiving a covered loan under section 7(a)(36) of the Small Business Act do not qualify.

QUALIFYING

  1. Operations of the company have been fully or partially suspended during a quarter either as a result of a governmental authority, OR
  2. Revenue in 2020 is less than 50% of the revenue from the same quarter in 2019

Once a business qualifies, it must continue to do so. The credit will continue until the earlier of:

  1. The end of 2020, or one of the following (depending on qualification method)
  2. A quarter without a government-required suspension of operations (if qualifying via #1 above)
  3. Gross revenue from the current quarter exceeds 80% gross revenue from the same calendar quarter in 2019 (if qualifying via #2 above)

Note that the metric used is revenue, not profit.

CALCULATING THE CREDIT

The refundable credit is computed on a calendar-quarter basis and is applicable for all wages—up to $10,000 paid to each employee or $5,000 in actual credit—paid between March 12, 2020, and before January 1, 2021.

  • For employers with an average of more than 100 employees, the credit can be claimed for all employees who are retained but not currently working as a result of COVID-19
  • For employers with an average of fewer than 100 employees, all wages paid qualify for the credit so long as they meet other requirements related to suspension of business or reduction in gross receipts
  • All employers treated as a single employer under Section 52(a) or (b) or Section 414(m) or (o) of the code will be treated as a single employer under this provision
  • Must factor in certain excludible group health plan costs.
  • Retention credit not applicable to federal or state employers, but available to organizations exempt under Section 501(c) of the code
  • Any eligible employer may elect out of the credit

To determine eligibility, see this helpful chart.

Megan Nichols, CFP®