Coronavirus (COVID-19), HR Management & Compliance

What Is the Employee Retention Tax Credit?

Most of us have heard of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which came with an over $2 trillion price tag and included provisions for economic impact payments (aka stimulus checks) for individuals, assistance for state and local governments, and Paycheck Protection Program (PPP) loan options for small businesses. What not everyone knows is that there were other provisions in the CARES Act, as well, one of which is the Employee Retention Tax Credit.tax

The Employee Retention Tax Credit was put into place as an incentive for employers to keep employees on staff as the economy retracts, even if there isn’t as much revenue coming in as before.

Not all employers will be able to take advantage of the PPP; the funds ran out before all of the qualified employers could get approved, and not all employers qualify. For those employers that do not take out a loan under the PPP, they may be eligible for this credit.

According to the Internal Revenue Service (IRS) website:

“The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.”

The key takeaways for employers about this act are:

  • An employer cannot take advantage of both the PPP loan and this credit. This credit is only available for an employer that did not get a PPP loan.
  • Eligible employers include those that experienced a full or partial suspension of business due to COVID-19 OR those that experienced a significant decline in receipts (this decrease must be at least 50% of the gross amount from the same quarter in 2019).
  • There are caps involved. The credit caps at $10,000 in pay per employee for that quarter, which means a maximum $5,000 credit per employee.
  • How many employees can be included depends on the size of the employer. See the IRS page for full details on these limits. In short, for employers with fewer than 100 employees, all employees still being paid can be counted; for employers with more than 100 employees, only employees who are being paid while not providing services can be counted.
  • The money can be claimed immediately by reducing the ongoing taxes paid to the IRS for payroll obligations. If the employer determines it’s owed more than its ongoing IRS tax obligations, the employer can get an advance from the IRS on this credit.
  • Wages that were subject to other credits in the CARES Act also cannot be counted toward this credit. (Again, see here for further details and exceptions.) In short, no double dipping is allowed on these types of credits.
  • This credit can be claimed each quarter by using IRS form 941.

If your organization did not get a PPP loan, this may be something to consider to offset costs during this time. If you’re still considering applying for a PPP loan, this credit may be another avenue to choose instead.

Bridget Miller is a business consultant with a specialized MBA in International Economics and Management, which provides a unique perspective on business challenges. She’s been working in the corporate world for over 15 years, with experience across multiple diverse departments including HR, sales, marketing, IT, commercial development, and training.