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COVID-19: The Employee Retention Tax

Credit



Updated May 12, 2020
The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) includes an employee
retention payroll tax credit intended to help businesses retain employees during the Coronavirus disease
2019, or COVID- 19, public health emergency. Employee retention remains a policy concern, as a number
of economic sectors have announced layoffs resulting from the COVID- 19 induced economic fallout.
Unemployment insurance claims have surged following these widespread layoffs. This Insight
summarizes the employee retention tax credit in the CARES Act, makes comparisons to previous
employee retention tax credits enacted as disaster tax relief, and highlights some economic and policy
considerations.

The Employee Retention Tax Credit
The employee retention tax credit (ERTC) allows eligible employers to claim a payroll tax credit of up to
$5,000 per employee for qualified wages paid while closed or having reduced operations due to COVID-
19. The credit is computed as 50% of up to $10,000 in qualified wages paid to an eligible employee.
(Eligible employees are generally those who have been employed by the employer for at least 30 days.)
Health plan expenses can be treated as qualified wages when computing the credit. The credit can be
taken for wages paid after March 12, 2020, and before January 1, 2021.
Eligible employers are those who (1) are required to fully or partially suspend operations due to a
COVID-19-related order (including nonprofit employers); or (2) have gross receipts 50% less than gross
receipts in the same quarter in the prior calendar year (with the credit no longer being available once gross
receipts are 80% of prior year calendar quarter gross receipts).
Qualified wages depend on the number of employees the employer had during 2019. If the employer had
more than 100 full-time employees, qualified wages are wages paid when employee services are not
provided. (Qualified wages are limited to the amount the employee would have been paid for working an
equivalent duration during the 30 days preceding the non-service period). If the employer had 100 or
fewer full-time employees, all employee wages paid by eligible employers are credit-eligible. Wages
taken into account for this credit cannot be taken into account for the tax credit for employer-provided
paid family and medical leave.

                                                               Congressional Research Service

                                        Employer Retention Tax Credit: Stylized Example


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