Explaining The Employee Retention Credit

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The CARES Act provides for an Employee Retention Credit that eases employers’ burden of maintaining payroll as the COVID-19 crisis unfolds. If a business is negatively impacted by the COVID-19 Pandemic, then the business may be eligible for a credit to apply against federal payroll taxes.

What is the credit?

Eligible employers will receive a tax credit to be applied against their quarterly payroll taxes. The credit equals 50% of each employee’s quarterly wages, but only up to $10,000 of employee wages may be used per year. Effectively, this limit caps the tax credit to $5,000 per employee per year. Assuming that the employer qualifies for a full year of the credit, the employer has a full credit against employee wages for employees whose total wages are equal to or less that $80,645.16. As such, if the employer is impacted for less than a year, then the employer can earn a credit to cover the federal payroll tax of higher earning employees.

For instance, Employee A earns total wages of $60,000 and Employee B earns total wages of $120,000, with quarterly payroll taxes (at 6.2% tax rate) of $930.00 and $1,860.00 respectively. Regardless of how long the employer is eligible, the employer can use the $5,000 credit to completely absorb Employee A’s annual payroll tax, which totals $3,720. However, the employer can only apply the credit to Employee B’s first two quarters of taxes, totaling $3,720, and the first $1,280 of the third quarters taxes.

Who is an eligible employer?

An eligible employer is a business that: (a) fully or partially suspended operations due to a governmental order responding to COVID-19 or (b) whose quarterly gross receipts are equal to or less than 50% of the gross receipts from the same quarter in the prior year. For tax exempt 501 organizations, only the “fully or partially suspended operations” condition applies to receive the credit.

How are wages calculated for each employee?

In addition to regular hourly or salary wages, “wages” include an employee’s share of employer covered group plan healthcare costs that are otherwise not included in employee gross wages. However, any amounts paid pursuant to the Families First Coronavirus Response Act’s paid family and sick leaves provisions are not includable in “wages”.

Employers with 100 employees or more can only include wages paid to an employee who is not performing services during the applicable period. Additionally, for such employers, the wages calculation per affected period is capped at the amount the employee earned the 30 days prior to such effected period. Employers with fewer than 100 employees can include wages paid to an employee regardless of whether the employee performs services during the applicable period and without the 30-day look back cap.

When is this credit in effect?

The credit may only be used for wages paid after March 12, 2020 until January 1, 2021.

Are unused credits refundable?

Any unused portion of the credit will be treated as an overpayment and eligible for a refund. Therefore, for the example used above, Employee A’s excess credit of $1,280.00 will be subject to a refund for the employer’s 2020 taxes.

Our team of employment attorneys is ready to answer any questions about the Employee Retention Credit and other tools available to Vermont businesses as a result of state and federal legislation.  To contact an attorney, email attorneys@sheeheyvt.com