The CARES Act Employee Retention Tax Credit
Gaining access to critical cash flow while maintaining compliance
The global health event continues to test the resolve and resourcefulness of companies striving to maintain operations while supporting the needs of their employees. To assist companies struggling to retain employees under challenging conditions, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes a new Employee Retention Tax Credit (ERTC) for wages paid after March 12, 2020 and before January 1, 2021.
Here are some tips, plus real-world examples of how both essential and non-essential organizations, including non-profits, have leveraged the ERTC to maintain operations during this time.
Retaining Employees, Delivering Quick Relief
The ERTC, an already-established mechanism for providing emergency relief to companies as a component of past disaster relief legislation, provides quick relief to companies and non-profit organizations in the form of a tax credit. The Disaster Tax Relief and Airport and Airway Extension Act of 2017, H.R. 3823, is one example. That act successfully provided tax relief to employers impacted by Hurricanes Harvey, Irma, and Maria.
As is sometimes the case with legislation, complexities and ambiguities have warranted further clarification. On April 29th, the IRS published a FAQ, and legislative proposals have been submitted recommending a variety of enhancements to the ERTC.
The Basics: Eligibility and Benefits
Eligible employers include:
- Companies carrying on a trade or business in 2020 that experienced partially or fully suspended operations because of orders of a governmental authority due to COVID-19; or
- Companies that experienced a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019.
The CARES Act ERTC is a 50% tax credit of up to $10,000 in qualified wages per eligible employee (a maximum credit of $5,000 per employee).
The Fine Print: Things to Consider
Qualified wages under the CARES Act for purposes of the ERTC are defined as wages paid by an eligible employer with respect to which an employee is not providing services due to either a full or partial suspension of operations or a significant decline in gross receipts. A special rule applies for employers with 100 or fewer full-time employees. Companies may choose to enlist professional guidance and/or carefully consider how to interpret the terms of this requirement.
An employee CANNOT be included in the CARES Act ERTC if the employer has claimed the Work Opportunity Tax Credit (WOTC) for the employee in the same period. Also, any wages used for purposes of the Employer Credit for Paid Family and Medical Leave Act, the Paid Sick Leave Credit (Section 7001 of the FFCRA) or the Paid Family Leave Credit (Section 7003 of the FFCRA) are not eligible, so companies need to examine their overall employee tax credit strategy.
At the same time, the CARES Act prohibits employers that receive a covered loan under the Paycheck Protection Program (Section 1102 of the CARES Act) to also claim the ERTC (unless the covered loan was repaid in full on or before May 18, 2020). Before applying for the PPP, companies should consider and calculate their eligibility for the ERTC.
Success Stories: How Companies Have Benefitted
ADP clients have shared examples of how they assessed eligibility and determined their best options under the CARES Act to support their business goals. Here are just a few examples:
- A multi-national retailer qualified for and captured over $50M in employee retention tax credits over the partial Q1 20 and Q2 20 periods. One challenge was accurately calculating eligible wages under the CARES Act that aligned to the definition of impacts due to mandated governmental closures. The retailer's unique organizational structure and different pay types added to the complexity. Working with ADP, they were able to make the right determination for their company and quickly secure tax credits to support their operational needs.
- A global hospitality company secured more than $5M in employee retention tax credits over Q2 20, which allowed existing staff to remain actively employed, avoiding further furloughs. Initially, the company didn't see a path towards eligibility due to a lack of insight into governmental orders. But after further discussions, they analyzed their locations against mandated government closures to identify specific operations and facilities that were qualified. The process from analysis to filing took less than two weeks, allowing them to pursue an advance payment of the credit using the IRS Form 7200 (Advance Payment of Employer Credits Due to COVID-19).
- A regional merchandising company identified and secured tax credits of more than $375k over the partial Q1 20 and Q2 20 period. The company remained open throughout the COVID-19 global health event, but experienced partial operational impacts across the country that qualified for the ERTC. Upon further consultation and analysis, they were able to leverage payroll data to maximize their ERTC in a way that was compliant with the CARES Act.
These are just a few examples of companies of different sizes and industries across the U.S. who were able to use the CARES Act ERTC to secure a much-needed source of cash to help maintain operations and retain employees in a timely manner.
Learn More and Stay Informed
Visit the ADP Employee Retention Tax Credit (ERTC) Rapid Response Center and the ADP Cares Act Tax Credit FAQ Resource Page
ADP continues to monitor and communicate legislative updates.
Get customizable email templates and in-depth information on resources to support employees during the COVID-19 crisis in the COVID-19 Employee Communications Toolkit.
