On March 25, 2020, the United States Senate unanimously approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The bill will be passed by the United States House of Representatives on March 27, 2020, and is expected to be signed by the President immediately.
The CARES Act is a $2.2 trillion dollar measure aimed at battling the immense economic impact that COVID-19 has had on the United States economy. In addition to providing a large cash infusion to hospitals and broader access to COVID-19 testing to individuals, the CARES Act aims to boost the economy with individual rebates and small business loans, increased unemployment benefits, and a wide variety of tax credits for businesses. This update is to provide some additional information and explanation of the employee retention tax credit.
Employee Retention Tax Credit
The employee retention tax credit (“ERTC”), which is found in Section 2301 of the CARES Act, provides a refundable payroll tax credit for 50 percent of qualified wages paid by employers to employees during the COVID-19 pandemic. The credit is available to employers whose (1) operations were fully or partially suspended, due to a COVID-19-related shut-down order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year.
For employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the coronavirus-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order.
The first hurdle a business has to overcome to obtain the tax credits is fitting the definition of a “qualified business.” A business meets the definition when (1) operations were fully or partially suspended, due to a COVID-19-related shut-down [government mandated] order, or (2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. The Act does not give precise definitions as to what constitutes either “partial” or “full” suspensions of operations, but arguments abound in many scenarios which would give employers a good faith basis to argue their operations were at least “partially” suspended due to the outbreak. Of course, if employers’ gross receipts declined by more than 50 percent compared to the same quarter last year, then they automatically qualify as a “qualified business” and the partial suspension argument is moot.
If the employer is a qualified business, then the second hurdle is determining if wages are “qualifying wages.” If the qualified business (with over 100 employees) is paying wages to employees that are unable to perform services due to full or partial suspension of operations or due to a loss of more than 50% of gross receipts, then those wages are deemed “qualified wages” and the credit applies. There is ambiguity regarding “performing services” and the act does not elaborate on this definition. Please note that even if the wages are qualified wages, there is a limitation clause that qualified wages may not “exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding such period.” Notably, the credit is provided for the first $10,000 of compensation, including health benefits, paid to an eligible employee. Wages paid under the FFCRA are not included as “qualified wages.” The credit is provided for wages paid or incurred from March 13, 2020 through December 31, 2020.
The ERTC allows a credit in each calendar quarter against the Old Age, Survivors, and Disability Insurance (“Medicare”) tax – or the Tier 1 tax imposed on employers subject to the Railroad Retirement Tax Act under 3221(a) of the IRC (“Tier 1 Tax”) – in the amount of 50 percent of wages paid by employers to employees during the COVID-19 crisis. The amount of the credit is not to exceed the applicable employment taxes (i.e., the Medicare Tax or the Tier 1 Tax), as reduced by any credits allowed under IRC Section 3111(e)(credit for employment of qualified veterans) and IRC Section 3111(f)(credit for research expenditures of qualified small businesses) and Sections 7001 and 7003 of the Families First Coronavirus Response Act (which provide for a tax credit against amounts equal to 100 percent of the qualified sick leave wages and qualified family leave wages paid by an employer with respect to such calendar quarter) on the wages paid with respect to the employment of all the employees of the eligible employer for such calendar quarter.
Therefore, the “applicable employment taxes” (i.e., Medicare or Tier 1 taxes) are first reduced by the presently available credits (i.e., IRC Sections 3111(e) and (f), and those available under the FFCRA), and then further reduced by the ERTC credit.
If the amount of the ERTC exceeds the applicable employment taxes for any calendar quarter, such excess shall be treated as an overpayment that shall be refunded under sections 6402(a) (refunding of overpayments) and 6413(b) (same) of the Internal Revenue Code.
Our Business Transactions Group is available to answer your questions and to provide guidance on these rapidly evolving issues, challenges and opportunities. In addition to the following, we are closely following the regulations on a state by state level defining essential business and other related matters. Please contact us if we may be of assistance.