Question: What is the employee retention credit? How does it work?
Answer: According to Kristin Esposito, AICPA Senior Manager for Tax Policy and Advocacy, the employee retention credit is a new tax credit provided for in the CARES Act. The goal of the credit is to help employers to retain employees during this time of economic uncertainty. A business that pays wages and experiences either a full or partial suspension of their operations due to a government order or has more than a 50% reduction in gross receipts in one or more quarters in 2020 as compared to the same quarter in 2019 is eligible for the credit. The credit is refundable and is applied against the employer portion of Social Security taxes (6.2%). The credit is equal to up to $5,000 for certain employees kept on the payroll by a business.
Example – Business that has a full or partial suspension of operations
A restaurant has ceased its in-room dining due to government order. However, it is still allowed to provide take-out and delivery services. The restaurant would be considered to have a partial suspension of its operations and would qualify for the credit if it paid wages.
Example – Business with greater than 50% decline in gross receipts
A car dealership (let’s say Alfa Romeo since I have one!) is open for business. However, their customers are under stay-at-home orders. In the second quarter or 2020, not many folks bought Alfa Romeos as compared to the second quarter in 2019. The dealership only had $200,000 of gross receipts in the second quarter of 2020 as compared to $1,000,000 in the second quarter of 2019. Since the dealership had a greater than 50% decline in gross receipts in the second quarter of 2020 as compared to the second quarter in 2019, it is eligible for the credit if it paid wages.