On April 29, 2020, the Internal Revenue Service (IRS) provided additional guidance on the employee retention credit (ERC) available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act via new frequently asked questions (FAQs).

The following summarizes the major issues by topic addressed in the new FAQs.

Qualified Wages

• The ERC is a fully refundable tax credit for employers equal to 50 percent of qualified wages up to $10,000 that eligible employers pay their employees after March 12, 2020 and before January 1, 2021. (FAQ 1)

• If an employer averaged more than 100 full-time employees in 2019 and was subject to a full or partial suspension of operations because of either a governmental shutdown order due to COVID-19 or “a significant decline in gross receipts,” amounts paid by the employer are qualified wages under the CARES Act, if such wages were paid to an employee who is unable to provide services due to COVID-19. Accordingly, wages paid for holidays, sick days, or other days off when an employee voluntarily did not provide services would not be considered “qualified wages” for purposes of the ERC if the employer averaged more than 100 full-time employees during 2019. However, an employer that averaged 100 or fewer full-time employees during 2019 may take a credit for all wages, including those paid for vacation or sick leave. (FAQs 6, 48, and 56)

• All wages paid to any employee by an employer averaging 100 or fewer full-time employees in 2019 due to a full or partial suspension of operations or “significant decline in gross receipts” are qualified wages. (FAQs 6 and 48)

• Wages paid to hourly and nonexempt salaried employees for hours that the employees were not providing services are considered qualified wages for the purposes of the ERC. An employer may use “any reasonable method” to determine the hours an employee is not providing services. Additionally, wages paid to exempt salaried employees for the time that they are not providing services would be considered qualified wages. Any reasonable method may be used to determine the hours an exempt salaried employee is not providing services. (FAQs 54 and 55)

• Payments for past employment relationships, including severance payments to former employees, are not considered qualified wages. (FAQ 57)

• Wages exempt from Social Security and Medicare taxes are not qualified wages. (FAQ 58)

• An eligible employer may not claim the ERC on the same wages for which it “received a credit for qualified sick and/or family leave wages” under the Families First Coronavirus Response Act (FFCRA). (FAQ 60)

• Qualified wages include an allocable portion of the “qualified health plan expenses” paid or incurred by an eligible employer. “Qualified health plan expenses are properly treated as qualified wages if the allocation is made on a pro rata basis among covered employees (for example, the average premium for all employees covered by a policy) and pro rata on the basis of periods of coverage (relative to the time periods for which such wages relate).” (FAQ 62)

• “The amount of qualified health plan expenses taken into account in determining the amount of qualified wages generally includes both the portion of the cost paid by the Eligible Employer and the portion of the cost paid by the employee with pre-tax salary reduction However, the qualified health plan expenses should not include amounts that the employee paid for with after-tax contributions.” (FAQ 63)

• An employer may not treat any amount paid for an employee’s healthcare coverage as qualified healthcare expenses included in qualified wages if that employer has laid off or furloughed the employee. (FAQs 64 and 65)

• An employer may allocate qualified health expenses to qualified wages even if it pays employees a reduced amount of wages for the time the employees are not providing services. (FAQ 66)

Eligible Employers

• Tax-exempt organizations described under Internal Revenue Code (IRC) Section 501(c) may qualify as eligible employers if they satisfy the eligibility requirements for the credit. (FAQ 20)

• Household employers are not considered a trade or business and thus are not eligible for the ERC. However, a household employer that is also an employer operating a trade or business and reports employment taxes for its employees on a Form 941, Employer’s Quarterly Tax Return, or Form 944, Employer’s Annual Federal Tax Return, may be eligible for the ERC to the extent the employer has qualified wages of a trade or business. (FAQ 24)

• The definition of “eligible employer” includes members of an aggregate group that are treated as a single employer. Accordingly, “all entities that are treated as a single employer under” IRC Sections 52(a) or 52(b) or Sections 414(m) or 414(o) “are considered one employer for purposes of the [ERC].” Such purposes include determining whether the employer’s operations are fully or partially suspended due to a governmental order; “the employer has a significant decline in gross receipts”; “the employer has more than 100 full-time employees”; and an employer is precluded from claiming the ERC because a member of the aggregated group obtained a Paycheck Protection Program loan. (FAQs 25–27)

Governmental Suspension Orders and Employers

• Orders, proclamations, or decrees from federal, state, or local governments, are considered “orders from an appropriate governmental authority” for purposes of the ERC. (FAQ 28)

• “An employer that operates an essential business that is not required to close its physical locations or otherwise suspend its operations is not considered to have a full or partial suspension of its operations for the sole reason that its customers are subject to a government order requiring them to stay at home.” (FAQ 32)

• An employer’s workplace that is closed for certain purposes due to a government order, but remains open for other limited purposes, is considered to have a partial suspension in operations. (FAQ 34)

• “An employer that reduces its operating hours due to a governmental order is considered to have partially suspended its operations since the employer’s operations have been limited by a governmental order.” (FAQ 35)

• An employer that operates in multiple locations and is subject to governmental orders limiting operations in some, but not all, jurisdictions is considered to have a partial suspension of operations. (FAQ 36)

• If an employer operating a trade or business with multiple members of an aggregated group has the operations of one member of the aggregated group suspended by a governmental order, then all members of the aggregated group are considered to have had their operations partially suspended for purposes of the ERC. (FAQ 37)

“Significant Decline in Gross Receipts”

 An employer is considered to have experienced a “significant decline in gross receipts” for the period beginning with the calendar quarter in 2020 for which its gross receipts “are less than 50 percent of gross receipts from the same calendar quarter in 2019. If the gross receipts decline to that extent, the employer also must later determine if there is a later calendar quarter in 2020 in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80 percent of its gross receipts for the same calendar quarter in 2019, or with the first calendar quarter of 2021.” (FAQ 39)

• An employer may claim the ERC “on qualified wages paid in 2020 if it determines that a significant decline in gross receipts occurred in 2020 even if it does not make the determination until after January 1, 2021.” (FAQ 42)
• “An employer that started a business in the first quarter of 2019 should use the gross receipts for the applicable quarter of 2019 for comparison to the gross receipts for the same quarter in 2020 to determine whether it experienced a significant decline in gross receipts in any quarter of 2020.”

An employer that started a business in a subsequent quarter of 2019 “should use that quarter as the base period to determine whether it had a significant decline in gross receipts” for that quarter and earlier quarters in 2020. (FAQ 44)

• An employer that acquires a trade or business during the 2020 calendar year may determine whether it has experienced a significant decline in gross receipts by comparing the gross receipts of the previous owner for the same calendar quarter in 2019, to the extent such information is available. (FAQ 45)
• The IRS plans to issue future guidance on how a tax-exempt employer can determine whether it experienced a significant decline in gross receipts. (FAQ 46)

Other Topics

• Full-Time Employees

  • “Full-time employee” is defined as “an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service in the month.” (FAQ 49)

• Self-Employed Individuals

  • A self-employed individual may not claim the ERC with respect to his or her own self-employment earnings, but may be able to obtain ERC for his or her employees. (FAQ 23)

• ERC and the Paycheck Protection Program (PPP)

  • An employer may not receive the ERC if the employer receives a PPP loan. (FAQ 79)

• ERC and the Work Opportunity Tax Credit (WOTC)

  • An eligible employer may not claim the ERC and the WOTC “for the same employee for the same period of time.” (FAQ 84)

• Qualified Wages and Employee Income

  • Qualified wages for purposes of the ERC are not excludible qualified disaster relief payments under IRC Section 139, “because qualified wages are what an individual would otherwise earn as compensation, rather than payments to offset any particular expenses that an individual would incur due to COVID-19.” (FAQ 85)

• ERC and Employer Deductions

  • The ERC reduces the expenses that an eligible employer could otherwise deduct on its federal income tax return. (FAQ 86)