The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), enacted on March 27, 2020, provides for an employee retention tax credit (Employee Retention Credit) that is designed to encourage Eligible Employers to keep employees on their payroll despite experiencing an economic hardship related to COVID-19. Eligible Employers can claim the Employee Retention Credit, equal to 50 percent of up to $10,000 in qualified wages (including qualified health plan expenses), on wages paid after March 12, 2020 and before January 1, 2021. Eligible Employers are those businesses, including tax-exempt organizations, with operations that have been fully or partially suspended due to governmental orders due to COVID-19 or that have a significant decline in gross receipts compared to 2019. For convenience, in these FAQs, references to the operations of a trade or business (or similar references) include the operations of a tax-exempt organization.
The Employee Retention Credit provides an Eligible Employer with a tax credit that is allowed against certain employment taxes. The credit is refundable, which means that Eligible Employers may receive payment of the portion of the credit that exceeds certain employment taxes that are due. In anticipation of receiving the Employee Retention Credit, Eligible Employers can reduce their federal employment tax deposits. Eligible Employers may also request an advance payment of the Employee Retention Credit for any amounts not covered by the reduction in deposits.
The Employee Retention Credit is one of several benefits provided under the CARES Act, along with benefits provided under the Families First Coronavirus Response Act (FFCRA), to assist private-sector businesses and tax-exempt organizations that have been financially impacted by COVID-19. These benefits include other tax credits, tax deferrals, and loans. Employers will need to consider which of these benefits are available and most appropriate for their circumstances. In certain cases, if the employer takes advantage of one of the tax benefits or receives a loan, other tax benefits may not be available. The specific tax and loan benefits employers must consider include:
- Paid sick leave and family leave refundable tax credits. Employers with fewer than 500 employees are required to provide paid sick or family leave to employees who are unable to work or telework due to certain circumstances related to COVID-19. These employers are entitled to refundable tax credits for the required leave paid, up to specified limits. For more information, see COVID-19-Related Tax Credits for Required Paid Leave Provided by Small and Midsize Businesses FAQs. However, the wages paid to employees that count for the paid leave credits cannot also be counted for purposes of claiming the Employee Retention Credit.
- Employment tax deferral. All employers may defer the deposit and payment of the employer’s share of social security tax imposed under section 3111(a) of the Internal Revenue Code (the “Code”). However, employers that received a Paycheck Protection Program (PPP) loan may not defer the deposit and payment of the employer’s share of social security tax that is otherwise due after the employer receives a decision from the lender that the loan is forgiven. For more information, see Deferral of employment tax deposits and payments through December 31, 2020.
- Paycheck Protection Program (PPP) loans. Small and mid-sized businesses may obtain a PPP loan that provides funds for up to eight weeks of payroll costs, including health and retirement benefits, and certain other expenses. The PPP loans may be fully forgiven when at least 75 percent of the funds are used for payroll costs and other requirements are satisfied. For more information, see the Small Business Administration’s Paycheck Protection Program website. However, an employer that receives a PPP loan is not allowed the Employee Retention Credit and is not permitted to defer the applicable employment tax after the employer receives a decision from the lender that the loan is forgiven.