The popular Paycheck Protection Loan is not the only tax-free cash infusion provided to businesses by the CARES Act. Section 2103 of the Act provides an additional means for employers to obtain tax free cash to assist in retaining employees during the period of business contraction caused by the Corona virus government mandates.
Section 2103 of the Act, entitled EMPLOYEE RETENTION CREDIT FOR EMPLOYEES SUBJECT TO CLOSURE DUE TO COVID-19, provides “eligible employers” a cash infusion by granting them a refundable credit against their payroll taxes for “qualified wages” paid subsequent to March 12, 2020. The credit reduces the amount the employer owes with its quarterly payroll tax return and to the extent it exceeds the employers share of the payroll tax it can be used to offset the amount the employer is required to deposit as withholdings from employees’ paychecks for income tax and the employee’s share of social security. To the extent the credit exceeds the foregoing amount employers receive a refund from the federal government.
Employers carrying on a trade or business in 2020 and tax exempt employers are eligible for the credit if either:
- Their business is fully or partially suspended during any calendar quarter due to a governmental order limiting commerce, travel, or group meetings (for commercial, social, religious or other purposes) due to the coronavirus disease; or
- For any calendar quarter beginning after December 31, 2019 if their gross receipts are less than 50% of gross receipts for the corresponding quarter of the preceding year. Eligibility continues through the calendar quarter in which gross receipts are greater than 80% of gross receipts for the prior year’s corresponding calendar quarter.
Subject to the limitation explained below “qualified wages” for an employer with over 100 employees are wages paid to employees who have been laid off during the period their business was fully or partially suspended. For an employer whose average number of employees is not greater than 100 “qualified wages” are wages paid to all employees during the quarters they met the eligibility test.
Eligible wages include the employer’s share of health insurance and are limited to $10,000 per employee. The credit is 50% of each employee’s eligible wage with the maximum credit for an employee being $5,000.
As mentioned above, any employer can use the credit to offset all amounts required to be deposited during the quarter and reported on its quarterly payroll tax return. To the extent the amount of credit to which the employer is entitled exceeds the payroll taxes and deposits due for the quarter and the employer can file Form 7200 with the IRS and receive a refund of the balance.
Although it does not appear that the cash infusion from the Employee Retention Credit for most employers will be as great as that from a Payroll Protection Loan, for an employer with a large number of low paid employees and not many non-payroll expenses qualifying for forgiveness it could actually be greater. For those employers who have missed out on the Payroll Protection Loan, they may want to consider utilizing the Employee Protection Credit.