Understanding the Employee Retention Credit

The Coronavirus (COVID-19) Pandemic has caused widespread, government ordered, shutdowns of many sectors of the United States economy, which has caused extensive job loss. Over 10 million Americans filed for unemployment benefits in March and far more claims are expected in the month of April, according to the U.S. Department of Labor.

In an effort to help curb the massive layoffs that we have been seeing, Congress has created a new federal income tax credit for employers that keep their workers on the payroll, and therefore out of the unemployment lines. The tax credit amount equals 50% of eligible employee wages paid by an eligible employer in a 2020 calendar quarter. It is subject to an overall wage cap of $10,000 per eligible employee.

Wondering if your business is eligible? Here’s a breakdown of eligibility criteria:

Eligible Employers:

Forced Closure This credit is available to employers, including non-profits, whose operations have been fully or partially suspended during a 2020 calendar quarter as a result of an order from an appropriate governmental authority that limits commerce, travel, or group meetings due to COVID-19.

Decline in Receipts The credit can also be claimed by employers that have experienced a greater-than-50% decline in gross receipts for a 2020 calendar quarter. The credit is disallowed for quarters following the first calendar 2020 quarter during which gross receipts exceed 80% of gross receipts for the corresponding 2019 calendar quarter. In short, you can be eligible in one quarter of the year and ineligible in another.

Number of Employees An eligible employer must have had an average of 100 or fewer full-time employees in 2019. In this instance, all employee wages are eligible for the credit (subject to the $10k wage cap) regardless of whether employees are furloughed due to COVID-19.

The 50% employee retention credit is available to cover eligible wages paid between March 13, 2020 and December 31, 2020. The $10k cap includes allocable health plan expenses as well.

Rules and Restrictions

The 50% employee retention credit is NOT allowed for:

  • Emergency sick leave wages or emergency family leave wages that small employers (those with fewer than 500 employees) are required to pay under the Families First Coronavirus Response Act (FFCRA). Those mandatory leave payments are covered by federal payroll tax credits granted by the FFCRA.
  • Wages taken into account for purposes of claiming the pre-existing Work Opportunity Credit under Internal Revenue Code (IRC) Section 21.
  • Wages taken into account for purposes of claiming the pre-existing employer credit for paid family and medical leave under IRC Sec. 45S.

The Employee Retention Credit is NOT available for employers that receive a potentially forgivable Small Business Administration (SBA) guaranteed Small Business Interruption Loan, issued pursuant to the