The Coronavirus Aid, Relief and Economic Security (CARES) Act creates a payroll tax credit designed to provide financial incentives for businesses to keep employees on their payroll during the COVID-19 crisis.
Businesses qualify if they are partially suspended, completely suspended or even closed as a result of a quarantine, isolation order or “safer-at-home” order. This credit is available for wages paid from March 13, 2020 through December 31, 2020. Wages earned before March 13, 2020 qualify if they were paid on or after March 13, 2020.
To help provide insight into the complexities of this legislation, Harris Shelton attorneys have broken down Retention Credit eligibility, exclusions and more:
What is the Tax Credit Amount?
The Retention Credit is for 50% of qualifying wages paid by the employer during an eligible calendar quarter. Businesses can apply the Retention Credit up to $10,000 per employee in total.
How Does Employer Size Affect Eligibility?
For businesses with 100 or fewer employees, all wages for the time period in which the business is affected can be credited.
For businesses with more than 100 employees, only wages paid to employees who are not providing services to their employer qualify. Full-time employees are defined under the same criteria as the Affordable Care Act, meaning that an employee must work at least 30 hours per week on average in a month.
Who is Eligible?
Only nongovernmental businesses are eligible for the Retention Credit. Eligibility will be determined for each business on a quarterly basis. There are two ways to reach eligibility:
- Businesses Suspension Eligibility
A business is eligible for any calendar quarter during which their business is partially or fully suspended due to federal, state or local government orders limiting commerce, travel or group meetings due to the COVID-19 pandemic.
- Gross Receipts Eligibility
Eligibility can also be reached for any calendar quarter in 2020 when the business’ gross receipts are less than 50% of their gross receipts for the same quarter in 2019. Gross Receipts Eligibility ends the first calendar quarter after the business’ gross receipts surpass 80% of their gross receipts for the same quarter in 2019.
What are the Qualifying Wages, Limitations, and Exclusions?
- Qualifying Wages
Qualified health plan expenses that are excluded from the gross income of employees qualify as wages for calculating the Retention Credit. For large employers, or those with more than 100 employees, wages paid to an employee cannot exceed the amount the employee was paid in the 30 days preceding the eligibility period for a similar duration. The CARES Act did not specify a determinative date for the business’ number of employees.
The amount of qualifying wages for each employee cannot exceed $10,000. Furthermore, any wages from Emergency Paid Sick Leave or Extended Family Medical Emergency Leave provided by the Families First Coronavirus Response Act cannot be included in qualifying wages. Furthermore, businesses who take advantage of a 7(a) SBA loan under the Paycheck Protection Program may not claim the Retention Credit.
Any wages paid to familial relatives of the employer or an individual who owns more than 50% of the business are excluded from calculations for the credit. Certain restrictions also exist for trusts and estates.
There are still many questions about how the Retention Credit will work and whether certain employees will qualify. For instance, it’s unknown whether the wages of employees of large employers who are providing some – but not all – of the services they usually provide qualify for the Retention Credit. Further guidance by the IRS will be crucial to understanding the nuances of the Retention Credit.
If you or your business are in need of legal guidance regarding recent COVID-19 legislation, please contact Harris Shelton, a full-service law firm, today.