Editor’s note: For the most up-to-date information on the Employee Retention Tax Credit, please visit our ERTC Eligibility page.
The largest federal stimulus bill in U.S. history, the Coronavirus Aid, Relief and Economic Security (CARES) Act, was signed into law on March 27, triggering $2.2 trillion in spending and relief measures for businesses and families grappling with the impact of coronavirus on their livelihoods and bottom lines. In this post, we’ll explain the tax credits and provisions targeted for employers and how they can take part.
Employee Retention Tax Credit (ERTC)
The Employee Retention Tax Credit (ERTC) is a new, short-term credit introduced through the CARES Act. Businesses that closed or suspended operations due to coronavirus can take a one-year credit against the qualified wages it continues to pay its employees between March 13, 2020, and December 31, 2020.
Which employers are eligible? Employers can qualify for the credit in two ways. First, if business operation is fully or partially suspended during any calendar quarter during 2020 due to orders from an appropriate government authority resulting from COVID-19. Second, if the business remained open, but gross receipts during any 2020 quarter fall below 50 percent of the level for the same quarter in 2019. In such cases, the business will then be entitled to a credit for each quarter, until the business has a quarter where it has recovered sufficiently that its receipts exceed 80 percent of what they were for the same quarter in the previous year.
Please note, if an employer receives forgiveness on a Payroll Protection Loan as part of the CARES Act, they are not eligible to take the ERTC credit.
How is the credit calculated? Employers can claim a credit worth 50 percent of qualified wages paid to each employee for that quarter through December 31, 2020. Qualified wage calculations break into brackets due to company size:
- Companies with more than 100 employees during 2019: Qualified wages are limited to wages paid by the employer during the quarter for the period of time the business was shut down.
- Companies with fewer than 100 employees in 2019: Qualified wages include those paid to employees during a shut-down, OR wages paid for each quarter that the business has suffered a sharp decline in year-over-year receipts, as described above.
For any size company, qualified wages include group health plan costs. In all cases, the amount of qualified wages for each employee for all quarters may not exceed $10,000 (generating a max credit of $5,000 per employee).
How to claim? Employers must report the ERTC credit via their quarterly payroll tax returns. Credits are refundable by IRS.
Delay of Payment for Employer Payroll Tax and Self-Employment Tax
The CARES Act splits and postpones the employer share of the 6.2 percent Social Security tax on payroll, effective from date of enactment through December 31, 2020. Fifty percent will be due on December 31, 2021, and the remaining half must be paid on December 31, 2022. This also applies to 50 percent of self-employment tax, with deferral of 25 percent until December 31, 2021 and the remaining 25 percent until December 31, 2022.
Please note, if an employer receives forgiveness on a Payroll Protection Loan as part of the CARES Act, they are not eligible for this deferral.
Employer-Paid Student Loans Excluded from Income
If an employer pays all or part of its employees’ student loan debt, either as routine practice or as temporary relief through the coronavirus crisis, they can earn tax credit for doing so.
The CARES Act permits employers to pay up to $5,250 of employee’s student loan debt on a tax-free basis. Please note, this is a combined limit of $5,250 for tuition paid on employee’s behalf plus student debt paid on employee’s behalf.
If you have questions about these or other aspects of the CARES Act, contact your RKL advisor or reach out to the RKL team using the form at the bottom of this page. Visit RKL’s Coronavirus Employer Resource Center to learn more about the CARES Act, read our latest guidance and register for our weekly webinar series.