Employee Retention Tax Credit for Employers Subject to Closure Due to COVID-19

COVID-19 Update

To help employers (including tax-exempt organizations) affected by the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (H.R. 748) provides for an employer federal tax credit against the Social Security portion of payroll tax that the employer pays. The act applies to wages paid from March 13, 2020, through December 31, 2020, and is available to qualified employers, which are employers who carried on a trade or business during 2020 and whose (1) operations were fully or partially suspended due to a COVID-19-related shut-down order or (2) gross receipts declined by more than 50% compared to the same quarter in the prior year.

The amount of the tax credit is equal to 50% of the first $10,000 in qualified wages (including health benefits) paid to each employee, up to a maximum tax credit of $5,000 per employee. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit. Qualified wages do not include sick leave wages or family leave wages paid pursuant to the Families First Coronavirus Response Act (H.R. 6201).

If the employer pays employee benefits that are greater than the amount the employer pays in the Social Security portion of payroll tax, the IRS will send the employer a check for the excess. The intent is for the employer to ultimately not pay out of pocket for any benefits owed to employees under the act. However, the payroll tax credit is available to employers quarterly, so the employer will have to front the benefits to employees and then be reimbursed. Employers also can elect not to apply the new provision.

How Manatt Can Help: We draw on the integrated resources of Manatt’s tax, employee benefits, and labor and employment practices to help employers understand the availability of these new federal tax credits under the CARES Act. We can provide experienced guidance to address the expected future guidance on substantiation and other procedures for obtaining this federal tax relief.

For More Information: Contact Jeffrey A. Mannisto, partner and leader, Manatt Tax, at jmannisto@manatt.com or 310.312.4212, or David Herbst, partner, Manatt Tax, at dherbst@manatt.com or 650.812.1320.

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