Employee Retention Tax Credits: Health Care Costs are "Qualified Wages" Even if Employees are Not Paid

Sarah Lockwood Church and Andrew J. Daly and Paul A. Kasicky and David Strosnider
Published May 19, 2020

Under provisions of the CARES Act, employers are permitted to take a refundable tax credit against the employer share of Social Security taxes in the amount of 50 of the "qualified wages" with respect to each employee, up to $10,000. The maximum employee retention tax credit is therefore $5,000 per employee. Under revised IRS guidance issued May 7, 2020, FAQs 64 and 65, qualified wages include health care costs, even if the employer is not continuing to pay wages and compensation to that employee. An employer can obtain the credit through offset against the employer’s income tax withholding and employer and employee payroll tax deposit amounts. Any remaining credit is refundable.

The employee retention tax credits are different depending on whether the employer has more or less than 100 full-time employees, subject to specific aggregation rules for related employers (generally, employees who work 30 or more hours a week or 130 hours in a month, on average).

  • For employers with 100 or fewer full-time employees in 2019, the tax credit is based on qualified wages paid to an employee during the calendar quarter for which the tax credit is claimed, whether or not the employee is providing services;
  • For employers with greater than 100 full-time employees in 2019, the tax credit is based on qualified wages paid to any employee who is not providing services during the calendar quarter for which the tax credit is claimed.

If you have any questions about this post, please contact your regular Saul Ewing Arnstein & Lehr LLP Tax & Employee Benefits attorney.

<< Back to HR Total Rewards list