Expert Insights on the Employee Retention Credit
By Richard Winchester
Professor of Law
Businesses that are not lucky enough to win the Payroll Protection Program lottery can get some limited financial relief from another temporary program that was included in the CARES Act. It’s called the Employee Retention Credit and it indirectly subsidizes a portion of the wages that a business pays to its workers during the economic slowdown. Here are the answers to some key questions about that program.
1. How big is the credit?
Eligible companies will receive a tax credit of up to $5,000 for the compensation paid to each qualifying employee in their workforce.
2. How does the credit work?
The credit will offset amounts the employer ordinarily pays in employment taxes. These are amounts that a business must pay on behalf of each worker to fund social security and Medicare. So, the tax credit simply relieves the employer from having to pay those taxes.
3. What companies will qualify for this tax credit?
The tax credit will go to employers who are under government orders to temporarily suspend their operations as a result of the COVID-19 outbreak. The credit is also available to employers whose gross receipts are less than half of what they were a year earlier. Any employer who qualifies under this second test will remain eligible until gross receipts reach 80 percent of what they were a year earlier. The program will expire on December 31, 2020. Self-employed individuals are not eligible. In addition, any company that received a loan through the Payroll Protection Program won’t qualify.
4. Is the government providing a tax credit for every worker on the payroll?
It depends on whether the firm employed over 100 full-time employees in 2019 or not. If the full-time workforce exceeded 100, the company will only get the tax credit for the wages paid to employees who are NOT actually working. For all other companies, the credit will be based on the compensation paid any employee in the workforce, whether they are working or not. However, even though the credit might be based on the wages paid to certain workers, it can be used to offset the company’s employment tax bill for its entire workforce.
5. How is the amount of the tax credit computed?
The credit is based on the first $10,000 actually paid to an employee after March 12 through December 31. In addition, the business will get $1 of credit for every $2 paid. However, if the business receives certain other tax credits that are based on a worker’s wages, such as the family and medical leave credit, those wages won’t be used to compute the company’s credit under this program.
As a general rule, if an employee’s wages are used to determine the amount of the credit, the employer will also include the amounts paid for health insurance on that employee. There is one important exception to this general rule when the employer has more than 100 workers. Under a recently released FAQ, such an employer can include the health insurance cost only when the employer continues to pay the employee. However, the Treasury recently indicated that it will revise that rule. So, stay tuned.
6. What if an employer gets a tax credit that exceeds its employment tax bill?
The employer could receive the rest as a refund. The IRS has also adopted a procedure that will permit an employer to receive an advance payment of the credit.
Richard Winchester is a Professor of Law at Seton Hall University School of Law and an expert in federal tax policy. His work is frequently cited in Congressional Reports on tax matters and he is also a national authority on small business and federal employment tax policy. Professor Winchester's biography and publications are available online.