COVID-19 Small Business Resource Center

Employee Retention Credit for Employers Subject to Closure Due to COVID-19 (Section 2301)

Updated: 11/18/2021

Private-sector employers may be eligible for a refundable tax credit against federal employment taxes for "qualified wages" paid by employers to employees during the COVID-19 crisis. The tax credit was set to apply to qualified wages paid after March 12, 2020.

Update: On November 15, 2021, the President signed the Infrastructure Investment and Jobs Act, which includes an early/retroactive sunset of the Employee Retention Tax Credit (ERC) as of September 30, 2021, except for recovery startup businesses. Employers should not apply any ERC amounts after September. Other than for recovery startup businesses, any ERC amounts that were applied after September will need to be reversed and paid to the IRS. We are actively monitoring this situation as well as evaluating how we can best help support clients that need to submit repayments to the IRS. For more important information regarding this change, please review our recent Eye on Washington.

Eligible Employers:

For the purposes of the Employee Retention Credit, eligible employers are those that carry on a trade or business during the calendar year, including a tax-exempt organization, that either:

• Fully or partially suspends operation during any calendar quarter due to orders from an appropriate government authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• Experiences a "significant decline in gross receipts" during the applicable calendar quarter.

Note: The American Rescue Plan Act also extended the tax credit to new businesses which started after February 15, 2020, with average annual receipts of under $1,000,000. They are referred to as recovery startup businesses. For such businesses, the amount of the credit may not exceed $50,000 per quarter.

Significant Decline in Gross Receipts:

For 2020, a significant decline in gross receipts is defined as a drop of at least 50 percent when compared with the same calendar quarter in 2019.

For 2021, a significant decline in gross receipts is defined as a drop of at least 20 percent when compared with the same calendar quarter in 2019, but employers have the option of using the gross receipts from the immediately preceding calendar quarter and the corresponding quarter in 2019 to determine whether they meet this threshold.

The significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter for which the employer's gross receipts for the quarter are greater than 80 percent of its gross receipts for the applicable calendar quarter during 2019.

Example:

An employer's gross receipts were $100,000, $190,000, and $230,000 in the first, second, and third calendar quarters of 2020. Its gross receipts were $210,000, $230,000, and $250,000 in the first, second, and third calendar quarters of 2019. Thus, the employer's 2020 first, second, and third quarter gross receipts were approximately 48%, 83%, and 92% of its 2019 first, second, and third quarter gross receipts, respectively. Accordingly, the employer had a significant decline in gross receipts commencing on the first day of the first calendar quarter of 2020 (the calendar quarter in which gross receipts were less than 50% of the same quarter in 2019) and ending on the first day of the third calendar quarter of 2020 (the quarter following the quarter for which the gross receipts were more than 80% of the same quarter in 2019). Thus, the employer is entitled to a retention credit with respect to the first and second calendar quarters.

Qualified Wages:

Qualified wages are wages and compensation paid by an eligible employer to employees after March 12, 2020, and before the applicable expiration date. Qualified wages include the eligible employer's qualified health plan expenses. The definition of qualified wages also depends, in part, on the average number of full-time employees employed by the eligible employer during 2019.

• If the eligible employer averaged more than 100 full-time employees (as defined under the Affordable Care Act Section 4980H) in 2019, qualified wages are the wages paid to an employee for time that the employee is not providing services due to either: (1) a full or partial suspension of operations by government order due to COVID-19; or (2) a significant decline in gross receipts. For these employers, qualified wages taken into account for an employee may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
• If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described above.

For wages paid from January 1, 2021 through the applicable expiration date, the above thresholds increase to more than 500 full-time employees and 500 or fewer full-time employees, respectively. Additionally, the 30-day rule for employers with more than 500 full-time employees doesn't apply to this period.

The American Rescue Plan Act relaxes restrictions on "Severely Financially Distressed Employers," defined as those that can demonstrate that gross receipts are less than 10 percent of the gross receipts of the corresponding base period (generally the same calendar quarter in 2019). These organizations may apply the credit to all wages paid to employees (up to the applicable $10,000 per employee per quarter limit), notwithstanding that they have over 500 employees. Normally employers with more than 500 full-time employees can only take the credit for wages paid to employees for time that the employee is not providing services (i.e., paid time off).

Maximum Credit:

2020

For wages paid in 2020, the credit equals 50 percent of the qualified wages (including qualified health plan expenses) that an eligible employer pays in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee is $10,000 for the year, so the employer's maximum credit for qualified wages paid to any employee is $5,000.

Example 1: The eligible employer pays $10,000 in qualified wages to Employee A in Q2 2020. The Employee Retention Credit available to the eligible employer for the qualified wages paid to Employee A is $5,000.

Example 2: The eligible employer pays Employee B $8,000 in qualified wages in Q2 2020 and $8,000 in qualified wages in Q3 2020. The credit available to the eligible employer for the qualified wages paid to Employee B is equal to $4,000 in Q2 and $1,000 in Q3 due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters.

2021:

For wages paid from January 1, 2021 through the applicable expiration date, the credit equals 70 percent of the qualified wages that an eligible employer pays in a calendar quarter. The cap on wages taken into account also increases to $10,000 per calendar quarter. 

In 2021, employers with 500 or fewer employees during 2019 may elect to receive an advance payment of the credit in an amount up to 70 percent of the average quarterly wages paid by the employer in 2019.

Restrictions:

• Employers who receive PPP loans may still be eligible for the tax credit to the extent qualified wages aren't paid using forgiven PPP loan proceeds.
• Credit is reduced by any Paid Family and Medical Leave Credit under IRC § 45S.
• Excludes paid sick leave or paid family leave wages paid under the FFCRA, however, this credit may apply to wages paid to the same employee once they return to work.
• Excludes wages paid for which the employer receives a Work Opportunity Tax Credit (WOTC).

Deferral of Employer Social Security Taxes (Section 2302)

Updated: 10/17/2022

Employers may defer payment of the employer share of the Social Security tax, beginning after the effective date of the CARES Act through December 31, 2020. Deferred tax amounts would be paid over two years, in equal amounts due on December 31, 2021 and December 31, 2022.

Restrictions:

The tax credits addressed elsewhere generally apply to employer Social Security taxes, potentially reducing or even eliminating such taxes for the balance of 2020. As a deferral, these taxes will become collectible by the IRS starting in December 2021. Employers should keep careful track of amounts accrued and be prepared to pay the amounts when due.

Note that the government recently passed the Payroll Protection Program Flexibility Act which, among other things, permits companies that received a Payroll Protection Program loan to continue deferring Social Security taxes through December 31, 2020.

Repayment of Taxes for ADP Clients:

ADP is preparing to assist RUN Powered by ADP® clients with the repayment of their deferred Social Security taxes. Deferred Social Security taxes must be paid back by the dates below to avoid failure-to-deposit penalties:

• You were eligible to defer $20,000 of your employer's share of Social Security tax for Q3 2020.
• You deferred $20,000.
• You must pay $10,000 no later than December 31, 2021, and the remaining $10,000 by December 31, 2022.

• You were eligible to defer $20,000 of your employer's share of social security tax for Q3 2020.
• You deferred $5,000 and deposited $15,000.
• You do not need to pay any amount on December 31, 2021, because you have already paid 50% of the eligible deferred amount ($10,000) and it was applied to the amount due on December 31, 2021.
• You must pay $5,000 by December 31, 2022.

Tax Exclusion for Employer Student Loan Repayment Benefits (Section 2206)

Updated: 1/7/2021

Employers are permitted to provide a student loan repayment benefit to employees, contributing up to $5,250 annually toward an employee's student loans. Such payments would be excluded from the employee's income. The $5,250 cap applies to both the new student loan repayment benefit and educational assistance under Section 127 of the Internal Revenue Code (IRC). As amended, the provision applies to any student loan payments made by an employer on behalf of an employee after date of enactment and through 2025 (previously December 31, 2021).