CARES Act – Employer Retention Credit

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The Cares Act is ‘phase 3’ of the federal stimulus package fighting the effects of COVID-19. As with most federal Bills this one has many facets to it that will assist a wide array of needs. The CARES ACT assists via Small Business Interruption Loans, the Economic Impact Payments, financial assistance to businesses that have been severely affected, the Employee Retention Credit, there are healthcare provisions, suspended federal student loan payments, and even addresses some withdrawals from retirement plans. This is just a summary of all the parts and parcels of this Act it is not all inclusive. 

You may ask if the CARES Act is phase 3, what were phase 1 and 2? Phase 1 would be considered the Coronavirus Preparedness and Response Supplement Appropriations Act or HR 6074, which affected federal agencies in their efforts to respond to COVID-19. Phase 2 is known as the FFCRA, Family First Coronavirus Response Act, or HR 6201, which provides provisions for certain leave as it relates to the affected workforce, additional federal unemployment assistance to the states, and additional protection for healthcare workers. 

Both the FFCRA and CARES acts affect business and their workforce. So, what is difference between the two? The CARES Act is designed to encourage eligible employers to keep employees on the payroll, despite economic hardship related to the COVID-19, with the Employee Retention Credit. The FFCRA Act requires certain employers to pay sick or family leave wages to employees who are unable to work or telework due to certain circumstances related to COVID-19. 

Today, I will focus on the Employee Retention Credit for employers under the CARES Act. This credit assists with meeting payroll obligations for small businesses. This is an option available to employers and is not required. But if you are a governmental employer or self-employed you are not eligible for this credit. Though if this option is used, it can negate some or all opportunities provided under the FFCRA Act (you can’t use the same wages for both) or all of the Small Business Interruption Loans. Businesses will need to weigh the various options provided to see which best meets their needs to stay operational and help with maintaining their workforce. 

To qualify for the Employee Retention Credit the business/employer will need to meet one of the requirements. The qualifiers are either the business has had to fully or partially suspend operation because of governmental orders due to COVID-19; or they experienced more than 50% decline in gross receipts as compared to the same quarter a year ago. Additionally, if the business averages 100 or less full-time employees in 2019, all wages (not just full-time employees) are qualified during the period March 12, 2020 through December 31, 2020. If the business averages over 100 full-time employees, only the qualified wages due to the suspension of operations or decline in gross receipts will be allowed for the credit. 

Now this credit is not dollar for dollar but at 50% of the outlay of payroll up to $10,000 per employee. This means the business would receive a qualifying credit up to $5,000 per employee. The credit would be received with the deferment of the employer contributed or employee withheld federal wage taxes. If the deferment is insufficient, the use of the new IRS 7200 form will provide an advance throughout the quarter based upon each payroll.